SSRN

FEDERAL TAX CRIMES
John A. Townsend
Partner, Townsend & Jones, L.L.P., Houston, Texas
Adjunct Professor, University of Houston School of Law
2013 John A. Townsend
Earlier versions of this book were used in a Tax Fraud and Money Laundering class taught by Larry
Campagna and Jack Townsend at the University of Houston School of Law. Those earlier versions
formed the basis for a text book on the topic, John A. Townsend, Larry A. Campagna, Steve Johnson
and Scott Schumacher, Tax Crimes (Lexis-Nexis 2008), which is now used in the class taught by
Larry and Jack and is used in some other law schools. Students in that class should use only the
assigned text; Jack does not recommend that students use this book, except as an optional
supplement to the book to explore particular topics of interest.
Solely for their own professional education, tax professionals or tax students other than students in
the class at the University of Houston Law School may also download and use this book. I caution
nonprofessional readers that this book is written for professional readers. There is a high risk that
nonprofessional readers may misinterpret the contents. Nonprofessional readers should not rely
upon any of the contents without obtaining independent advice, in which case they should rely upon
that independent advice and not their understanding of this text. Jack requests that persons other
than students downloading the book notify him, preferably by email, of the download and intended
use:
5615 Kirby Drive, Suite 830
Houston, Texas 77005
(713) 521-9977
(713) 893-2509 (Fax)
jack@tjtaxlaw.com
This book is not intended to give legal advice and may not be relied upon for making legal decisions
without independent research.
The book is somewhat sprawling and necessarily shaped by my experience in this area of the law.
In that sense it is anecdotal rather than encyclopedic, but I do think I have covered most of the main
themes in criminal tax cases. In later editions, I will be adding more topics and nuances, and,
depending upon time I will tighten up the presentation in the book.
Finally, I would appreciate the input of readers, particularly as to corrections or how any treatment
can be better presented.
Revisions Through February 5, 2013
Electronic copy available at: http://ssrn.com/abstract=2212771
CREDITS AND METHODOLOGY

I.
Acknowledgments.
So many people have contributed to this book in so many ways.
My wife, Irene, is a great supporter. This publication would not exist without her tolerance
and encouragement.
I have been inspired and educated by many colleagues over the years. I mention two
specifically. First, my partner, Larry Jones, has made me a better lawyer over the years and has
contributed his comments to various facets of this book. Larry previously taught a similar course
at SMU Law School and now teaches the tax clinic there. Second, my colleague, Larry Campagna,
and I co-taught this class in the Springs of 2001, 2003, 2005, 2007 and 2009. Larry is a major player
in the tax crimes practice in the Southwest. Larrys contributions to this text are significant.
My colleagues at the Department of Justice Tax Division (DOJ Tax) where I started the
practice of tax law gave me a solid foundation. There I was blessed to be influenced by giants -- like
the late Professor Ernest Brown and John Murray, and others too numerous to mention. In addition,
I learned from the highly professional people I dealt with at the IRS.
Since I entered private practice many years ago, I have continued to be influenced by my
friends at DOJ Tax and the IRS and have also been influenced by my colleagues in the private bar,
many of whom are also giants and most of whom are friends, tolerating gracefully both my excesses
and deficiencies.
I have also been greatly influenced by my students over the years at the University of
Houston School of Law; they gave me the encouragement and incentive to do my best and held me
accountable, as I hope they will do with this edition of the book. My students have made me a better
teacher and lawyer. I hope I also have contributed to their development as lawyers. I am reminded
of a quote from Thomas Jefferson:
"He who receives an idea from me, receives instruction himself without lessening
mine; as he who lights his taper at mine, receives light without darkening me."
An earlier version of this book was a starting point for a Tax Crimes book directed to LLM
students. That book is John A. Townsend, Larry A. Campagna, Steven Johnson, and Scott
Schumacher, Tax Crimes (Lexis-Nexis 2008). My co-authors did the bulk of the work updating,
supplementing and refining a prior version of this book to make it suitable for LLM students. Many
of their improvements are reflected in this book, but I am solely responsible for the deficiencies in
this book.
Townsend on Federal Tax Crimes (2013 ed. 01)
-i-
Revisions through 2/5/13
Electronic copy available at: http://ssrn.com/abstract=2212771
Finally, but certainly not least, my assistant, Merry Nelson, contributed through reading this
book and correcting many errors of syntax and substance as occasionally my exuberance in writing
exceeded my ability to communicate effectively.
II.
Notes to Students on Terms and Methodology.

A.
Acronyms, Initialisms and Other Shorthandisms.
Short-hand references in the form of acronyms and their cousins (which I refer to herein as
acronyms)1 are common in the tax crimes area, as they are throughout the law and life.2 Attorneys
use and abuse them frequently.3 When I first use them in the book, I define the acronym but usually
thereafter use the acronym without definition. I include in the appendix materials a Glossary of
Acronyms relevant to this book.
Authorities on the English language often articulate the difference between acronyms
and initialisms both based on the same short-hand techniques (most often the initial letters of the
series of words) as follows: An initialism is a word made up of initial letters that are pronounced
separately as letters rather than as a word (e.g. IRS or FBI); an acronym is a word that is also made
of up of initial letters that are spoken as a word rather than separate letters (e.g., NATO). See
University of Chicago Press, Chicago Manual of Style 15.3, Some Definitions (Online Edition as
of 3/8/07). Similar short-hand techniques are encountered and may be variations on the theme
e.g., FBAR (for foreign bank account reports studied in this class) and FinCen for the Financial
Crimes Enforcement Network. For ease of reference and at the risk of offending purists, I refer in
this book to all such techniques as acronyms.
2
With so many acronyms in use that have not found their way into standard
dictionaries, there ought to be some accepted way to determine what an acronym means. One author
earlier predicted that one of the top legal journals of the 1990's would be The Journal of Legal
Acronyms. Ronald L. Brown, Rave Reviews: The Top Ten Law Journals of the 1990s, 12 Legal
Reference Servs. Q. 121 (1992), cited in Thomas E. Baker, A Compendium of Clever and Amusing
Law Review Writings: An Idiosyncratic Bibliography of Miscellany with in Kind Annotations
Intended as a Humorous Diversion for the Gentle Reader, 51 Drake L. Rev. 105 (2002). But, alas,
I am not aware that that prediction has come to fruition.
3
In Nat'l Ass'n of Regulatory Util. Comm'rs v. United States DOE, 680 F.3d 819, ___
n. 1(D.C. Cir. 2012), the Court expressed frustration with the parties overuse of obscure acronyms.
Said the Court:
We also remind the parties that our Handbook of Practice and Internal Procedures
states that parties are strongly urged to limit the use of acronyms and should
avoid using acronyms that are not widely known. Brief-writing, no less than
written English, is full of bad habits which spread by imitation and which can be
avoided if one is willing to take the necessary trouble. George Orwell, Politics and
the English Language, 13 Horizon 76 (1946). Here, both parties abandoned any
attempt to write in plain English, instead abbreviating every conceivable agency and
statute involved, familiar or not * * *.
- ii -
B.
Caution as to Quotes.
Readers of this book should note the following general patterns when I quote from other
sources.
C.
I generally omit footnotes from the quoted sources.

I often omit case citations, particularly string case citations. I do this principally so
that the text is more readable for the content of the thought being expressed.
Sometimes I will leave the citation in if it is a particularly important citation, such
as a Supreme Court or other leading case.
When I quote a citation to a Supreme Court case, I omit parallel citations (e.g., S.Ct.
and L.Ed. citations) and include only the U.S. citation, if it is available.
Readers are cautioned that, simply because the item is presented herein as a quote,
do not assume that the quote in the original is exactly as presented. As an example,
if the quote were to read I saw the dog and, at the same time and next to the dog, the
cat, I might truncate the quote to I saw the cat if the only point I want to make
from the quote is that the speaker saw the cat. I have been careful not to select only
words in a way that changes the meaning, but the quote may not be exact. I think
this adds to the readability and is more helpful because I want to the student to
comprehend the materials rather than provide a source for quotes. When you are
quoting, therefore, always go to the original source rather than lift the quote from this
book..
Jury Instructions.
In this book, I often use jury instructions to summarize the elements of the crime and discuss
other concepts that are presented to a jury to consider in its decisions. Good jury instructions present
the legal concepts in laymens terms and thus are good tools to capture the gravamen of the legal
concepts, particularly the elements of any crime for which the lay jury must either convict or acquit.
Often, I use so-called pattern jury instruction approved by panels for one or more of the
United States Circuit Courts of Appeals.4 Within the circuits, these pattern jury instructions are
usually the starting point for fashioning the actual instructions that will be used in any case. The
district judge trying the case is required to give instructions appropriate to the specific case being
tried, and hence may modify the pattern instructions as appropriate to the case. Moreover, merely
because the Circuit Courts in some manner sponsor the pattern jury instructions does not mean that
they are necessarily correct instructions on the law or cannot be improved. Even, on their face, they
can be deficient, thus requiring judges and trial lawyers to exercise some diligence in their use.5
4
A Circuits pattern jury instructions are usually available through its web site. The
Fifth Circuits patterns jury instructions web page also also contains links to other Circuits pattern
instructions.
5
See e.g., United States v. Svete, 521 F.3d 1302, 1310(11th Cir. 2008) (holding that
the 11th Circuit pattern jury instruction on mail fraud is deficient as to the scope of the burden on
- iii -
Nevertheless, unless I specifically caution otherwise, the Circuit pattern jury instructions I use in
this text do adequately state the law (in my judgment).6
When I find a pattern jury instruction is unavailable or is, in my judgment, not up to the task
for which I need it, I try to find instructions from other sources. The principal alternative source that
I use is the jury instructions in the DOJ Criminal Tax Manual (CTM).7 CTM is prepared and used
by DOJs Tax Division Criminal Enforcement Section (often referred to herein as DOJ Tax CES).
The most recent version is the 2008 edition of the CTM which is on the web.8 References herein
to the CTM are generally to this 2008 edition unless otherwise noted. The CTM is an important
introduction to tax crimes from perspective of DOJ Tax CES, the principal player in the criminal tax
enforcement system.9 Prominent in the tools offered in the CTM are proposed jury instructions in
criminal tax cases and these instructions are the most complete single source for at least starting
point jury instructions. Like the pattern jury instructions, however, I caution practitioners and
students to review the CTM jury instructions independently and even skeptically to insure that they
are consistent with the law and with the facts of the case.10 The principal reservation that I have
the Government.) The holding that the pattern instruction was deficient was subsequently reversed
in United States v. Svete, 556 F.3d 1157 (11th Cir. 2009), but the key point is that pattern jury
instructions do not necessarily state the law. When they do, the use of the instruction will be
sustained, but when they do not, the use will not be sustained provided that the resulting error rises
to the level of a reversible error.
I also give another example below for the crime of tax evasion, the first crime discussed in
this text. I use an actual charge from a recent case rather than a pattern jury instruction. I previously
used the Fifth Circuit pattern jury instruction. In my opinion, the Fifth Circuit pattern jury
instruction is misleading or incorrect. See also United States v. Maggert, 2011 U.S. App. LEXIS
10976 (11th Cir. 2011) (involving a similarly deficient Eleventh Circuit pattern jury instruction
which, in the case, was sustained under the plain error standard).
6
In a real life situation, particularly where someones liberty is on the line, it is always
necessary to test my assumptions in this respect and all other respects. To illustrate, in earlier
versions of this text, I previously presented the Fifth Circuit pattern jury instruction for tax evasion
to present the elements of the crime of tax evasion. I was wrong. I have now replaced that pattern
instruction with another form instruction from the CTM.
7
DOJ CTM (2008).
8
Even this version may have updates in particular portions after 2008.
Prior versions of the CTM are on the web as well. Sometimes, it may be helpful for
complete understanding to track the changes that DOJ Tax CES made from version to version.
9
Many of the more important criminal tax policies referenced in the CTM are repeated
or summarized in the United States Attorneys Manual (USAM). USAM 6.100. And these are
repeated in the CTM 2.00 (2008 ed.).
10
In United States v. Trevino, 419 F.3d 896, 902-903 (9th Cir. 2005), the trial court gave
an instruction straight out of the CTM. The instruction was that a return or other tax document
signed with the defendant's name creates a rebuttal [sic] presumption that the defendant actually
signed it and had knowledge of its contents. The court held that it was error to give that instruction
because, obviously the presumption short-circuited the requirement that the Government prove the
- iv -
about the CTM jury instructions is that they are drafted by one of the parties (or the lawyers for the
party) to criminal cases and thus may state that partys interpretation rather than either an objective
interpretation of the law or, heaven forbid, a defendant friendly interpretation. Still, the CTM jury
instructions are an important source for practitioners to anticipate the instructions the Government
will request.
III.
Request for Readers Comments.
This is the current text for what is an ongoing draft. I often (several times weekly) add new
materials, develop nuances and correct old errors. Sometimes, in the process, I introduce new errors.
There are still bugs. Many are typing and presentation issues, for which I beg your indulgence.
Other errors are substantive, despite my best efforts. I am sure that I have both overincluded
and underincluded in these materials. More importantly, I suspect that in my attempt not to distract
you with many detailed nuances, I have attempted simplification, sometimes at the cost of
oversimplification. I beg your indulgence for these errors, which I hope are few.
I appreciate feedback from the reader so that I can improve myself and my text.
IV.
Other Resources.
For other resources you may find helpful for further research in this area, please see
Appendix G.
elements of the offense.

-v-
TABLE OF CONTENTS
CREDITS AND METHODOLOGY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i
I.
Acknowledgments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i
II.
Notes to Students on Terms and Methodology. . . . . . . . . . . . . . . . . . . . . . . . ii
A.
Acronyms, Initialisms and Other Shorthandisms. . . . . . . . . . . . . . . . ii
B.
Caution as to Quotes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . iii
C.
Jury Instructions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . iii
III.
Request for Readers Comments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . v
IV.
Other Resources. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . v
CH. I INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
I.
Scope of the Materials. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
II.
The Criminal Justice System. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
III.
Introduction to the Criminal Tax System. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
A.
The Purpose of the Criminal Tax System. . . . . . . . . . . . . . . . . . . . . . . . 5
B.
Penalties as Incentives for Compliance; the Audit Lottery.
..........................................................7
C.
Willfulness, Mens Rea and the Guilty Mind. . . . . . . . . . . . . . . . . . . . 10
D.
Overview of the Procedural Aspects of the System. . . . . . . . . . . . . . . 16
1.
IRS Phase. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
a.
General. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
b.
Priorities and Allocation of Resources. . . . . . . . . . . . . 18
(1)
General. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
(2)
The Webster Commission Report. . . . . . . . . . . 18
c.
TIGTA Reports on CI. . . . . . . . . . . . . . . . . . . . . . . . . . 18
d.
Influence of Other National Priorities. . . . . . . . . . . . . 19
2.
DOJ Tax Approval Phase. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
3.
Grand Jury and Prosecution Phase. . . . . . . . . . . . . . . . . . . . . 21
a.
The Prosecutor. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
b.
The Grand Jury Investigation. . . . . . . . . . . . . . . . . . . . 22
c.
Indictment and Trial. . . . . . . . . . . . . . . . . . . . . . . . . . . 23
4.
Sentencing Phase. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
5.
Appeals. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
IV.
Punishment and Fines. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
V.
Relationship of Tax Crimes to White Collar Crimes. . . . . . . . . . . . . . . . . . . 24
VI.
Methodology. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
CH. 2 - THE TAX CRIMES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
I.
TAX CRIMES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
A.
Tax Evasion ( 7201). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
1.
The Statute. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
2.
The Elements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
3.
Notes and Materials. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
- vi -
a.
b.
c.
B.
C.
Evasion Assessment v. Payment. . . . . . . . . . . . . . . . . 28

Affirmative Attempt. . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Willfulness. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
(1)
Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
(2)
Pomponio. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
(3)
Cheek. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
(4)
Tax Protestors. . . . . . . . . . . . . . . . . . . . . . . . . . . 53
(5)
Conscious Avoidance and Its
Variations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
(6)
Reliance on Professional . . . . . . . . . . . . . . . . . . 67
(7)
Complexity and Uncertainty in the
Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
(8)
Psychiatric / Psychological Defenses
to Willfulness. . . . . . . . . . . . . . . . . . . . . . . . . . . . 79
(9)
Amended Returns. . . . . . . . . . . . . . . . . . . . . . . . 85
d.
Proving Willfulness. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87
e.
Tax Due and Owing. . . . . . . . . . . . . . . . . . . . . . . . . . . . 90
(1)
No Tax, No Tax Evasion. . . . . . . . . . . . . . . . . . . 90
(2)
Substantiality and Materiality. . . . . . . . . . . . . . 95
(3)
Criminal Tax Numbers. . . . . . . . . . . . . . . . . . . 97
(4)
Corporate Diversions. . . . . . . . . . . . . . . . . . . . . 97
f.
Who Can Be Guilty of Tax Evasion Taxpayers Surely; Any Others? . . . . . . . . . . . . . . . . . 103
g.
Ex Post Facto Solutions to Tax Evasion. . . . . . . . . . . 105
Tax Perjury ( 7206(1)). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105
1.
The Statute. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105
2.
The Elements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106
3.
Notes and Materials. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106
a.
Tax Perjury. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106
b.
Materiality. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107
c.
Declaration of Perjury. . . . . . . . . . . . . . . . . . . . . . . . . 109
d.
Belief as to Truth. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110
e.
Willfulness. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111
f.
Tax Due and Owing Not Required. . . . . . . . . . . . . . . 111
g.
Required Documents. . . . . . . . . . . . . . . . . . . . . . . . . . 112
h.
Ingredient Technology. . . . . . . . . . . . . . . . . . . . . . . . . 113
i.
Further Notes on Materiality. . . . . . . . . . . . . . . . . . . . 114
j.
True But Misleading Answers. . . . . . . . . . . . . . . . . . . 116
Aiding or Assisting False Return ( 7206(2)). . . . . . . . . . . . . . . . . . . 119
1.
The Statute. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 119
2.
The Elements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 119
3.
a.
Not the Same as Aiding and Abetting. . . . . . . . . . . . . 120
b.
Willful Assistance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120
- vii -
D.
E.
F.
G.
c.
Document False as to a Material Matter. . . . . . . . . . 120
d.
Willfulness. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 121
Tax Obstruction - Corruptly Impeding Tax
Administration ( 7212's Omnibus Clause). . . . . . . . . . . . . . . . . . . . 121
1.
The Statute. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 121
2.
The Statutes Parentage - the Title 18 Obstruction
Statutes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 122
3.
The Elements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 123
4.
a.
Brief Comments on the Elements. . . . . . . . . . . . . . . . 124
(1)
Corrupt Conduct. . . . . . . . . . . . . . . . . . . . . . . . 124
(2)
Endeavoring. . . . . . . . . . . . . . . . . . . . . . . . . . . . 126
(3)
Obstructing or Impeding. . . . . . . . . . . . . . . . . 127
b.
Background. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127
c.
Relationship to More Specific Crimes. . . . . . . . . . . . 128
d.
Post Filing Conduct Only? . . . . . . . . . . . . . . . . . . . . . 133
5.
Synthesis. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 136
Failure to File, Keep Records, Supply Information or Pay
Tax ( 7203). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 137
1.
The Statute. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 137
2.
The Elements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 138
3.
a.
Brief Comments on the Elements of Failure
to File. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 138
(1)
Duty to File Return. . . . . . . . . . . . . . . . . . . . . . 138
(2)
Failure to File Timely. . . . . . . . . . . . . . . . . . . . 139
(3)
Willfulness. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 139
b.
Miscellaneous. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 141
c.
Failure to Pay. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 141
Failure to Collect and Pay Over ( 7202 & 7215). . . . . . . . . . . . . . 142
1.
The Statutes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 142
2.
The Elements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 142
3.
Materials. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 143
a.
The Withhold and Pay Over Obligation. . . . . . . . . . . 143
b.
Inability to Pay. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 144
c.
Relationship to 7215. . . . . . . . . . . . . . . . . . . . . . . . . . 145
d.
Relationship Between 7202 and 7201. . . . . . . . . . 145
e.
Example - Evangelista. . . . . . . . . . . . . . . . . . . . . . . . . 146
f.
Notes on Evangelista. . . . . . . . . . . . . . . . . . . . . . . . . . . 150
Fraudulent or False Returns, Statements or Other
Documents ( 7207). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150
1.
The Statute. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150
2.
The Elements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 151
3.
Materials. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 151
- viii -
II.
a.
Overlap with Other Tax Crimes. . . . . . . . . . . . . . . . . 151
b.
DOJ Tax Charging Policy for 7207. . . . . . . . . . . . . 151
c.
Government Choice. . . . . . . . . . . . . . . . . . . . . . . . . . . 152
H.
Currency Transaction Reporting ( 6050I). . . . . . . . . . . . . . . . . . . . 153
1.
The Statute. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 153
2.
The Elements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 154
a.
Failure to File. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 154
b.
Filing a False Return. . . . . . . . . . . . . . . . . . . . . . . . . . 154
c.
Assisting in Filing False Forms 8300. . . . . . . . . . . . . . 154
d.
Structuring. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 154
3.
Materials. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 154
I.
More on Substantiality and Materiality. . . . . . . . . . . . . . . . . . . . . . . 155
1.
LGM CT-1 (10/16/95) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 155
2.
LGM CT-1 (1992). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 155
TRADITIONAL NONTAX CRIMES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 157
A.
Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 157
B.
Aiding and Abetting (Accomplice) Liability and Causer
Liability (18 U.S.C. 2). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 158
1.
The Statute. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 158
2.
2(a) Aiding and Abettor / Accomplice Liability. . . . . . . . . 158
a.
The Elements: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 158
b.
Materials. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 159
(1)
General. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 159
(2)
Association with Criminal Venture.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 160
(3)
The Accomplice Must Have the
Principals Mens Rea. . . . . . . . . . . . . . . . . . . . 160
(4)
Co n c e p t u a l O ve r l a p wi t h
Conspiracys Pinkerton Doctrine of
Vicarious Liability. . . . . . . . . . . . . . . . . . . . . . 160
(5)
Relationship to Aiding and
Assisting, 7206(2). . . . . . . . . . . . . . . . . . . . . . 161
3.
2(b) Causer Liability. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 163
a.
Elements: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 163
b.
Materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 163
(1)
Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . 163
(2)
What does Causer Liability Really
Do? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 164
4.
The Limits and Scope of 2 Derivative Liability. . . . . . . . . 165
C.
False, Fictitious and Fraudulent Claims (18 U.S.C. 287
& 286). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 167
1.
The Statute. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 167
2.
The Elements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 168
a.
287 - False Claims. . . . . . . . . . . . . . . . . . . . . . . . . . . 168
- ix -
D.
b.
286 Conspiracy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 168
3.
Materials. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 169
a.
Falsity and Materiality. . . . . . . . . . . . . . . . . . . . . . . . . 169
b.
The Defendant Must Know of the Falsity. . . . . . . . . . 169
c.
Conspiracy to Submit a False Claim. . . . . . . . . . . . . . 169
d.
Overlap with More Focused Tax Crimes. . . . . . . . . . 169
Conspiracy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 170
1.
The Statute. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 170
2.
The Elements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 170
a.
Offense Conspiracy. . . . . . . . . . . . . . . . . . . . . . . . . . . . 170
b.
Defraud Conspiracy (Klein Conspiracy). . . . . . . . . . 171
c.
Other Instructions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 171
3.
Materials. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 172
a.
General. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 172
b.
The Agreement. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 175
c.
Conspiracy is Independent of the
Substantive Offense. . . . . . . . . . . . . . . . . . . . . . . . . . . 178
d.
Scope of the Conspiracy. . . . . . . . . . . . . . . . . . . . . . . . 179
(1)
Pinkerton - Vicarious Substantive
Offense Liability. . . . . . . . . . . . . . . . . . . . . . . . 179
(2)
Overt Acts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 182
(3)
Hub and Spoke Conspiracy. . . . . . . . . . . . . . . 183
e.
Offense Conspiracy. . . . . . . . . . . . . . . . . . . . . . . . . . . . 184
f.
Defraud Conspiracy - the Klein
Conspiracy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 187
(1)
Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . 187
(2)
It Depends on What Defraud
Means. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 187
(3)
Final Thoughts on the Defraud
Conspiracy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 195
g.
Government Option - Offense or Defraud
Conspiracy or Both? . . . . . . . . . . . . . . . . . . . . . . . . . . 196
(1)
Conceptualizing the Issue - Its All
About Scope. . . . . . . . . . . . . . . . . . . . . . . . . . . . 196
(2)
Overlap. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 199
(3)
Charging Offense and Defraud
Separately. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 203
h.
Overt Act. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 204
(1)
General Conspiracy Statute. . . . . . . . . . . . . . . 204
(2)
Special Conspiracy Statutes. . . . . . . . . . . . . . . 206
i.
Objectives, Concealment and Statute of
Limitations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 207
j.
Single or Multiple Conspiracies; Multiple
Objectives. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 208
-x-
III.
k.
Unindicted Co-Conspirators. . . . . . . . . . . . . . . . . . . . 208
l.
Withdrawal. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 208
m.
Hearsay of Co-Conspirator Admissible. . . . . . . . . . . 212
E.
False Statements (18 U.S.C. 1001). . . . . . . . . . . . . . . . . . . . . . . . . . 213
1.
The Statute. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 213
2.
The Elements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 214
3.
Materials. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 215
a.
Basis for the Crime. . . . . . . . . . . . . . . . . . . . . . . . . . . . 215
b.
Intent to Deceive. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 215
c.
Knowingly and Willfully. . . . . . . . . . . . . . . . . . . . . . . 215
d.
Relationship to Perjury. . . . . . . . . . . . . . . . . . . . . . . . 217
e.
False Statements Not Yet Made. . . . . . . . . . . . . . . . . . 223
f.
The Judicial Function Exception. . . . . . . . . . . . . . . . . 223
g.
Materiality. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 224
h.
Exculpatory No. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 224
i.
DOJ Tax Policies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 231
j.
Additional Notes on 18 U.S.C 1001. . . . . . . . . . . . . . 232
F.
Mail Fraud and Wire Fraud. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 232
1.
The Statutes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 232
2.
The Elements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 233
a.
Mail Fraud. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 233
b.
Wire Fraud. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 234
3.
Materials. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 235
a.
Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 235
b.
Fraud is Fraud: The Pendulum Swings. . . . . . . . . . . 235
c.
Materiality. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 236
d.
Use of the Wires Element. . . . . . . . . . . . . . . . . . . . . . . 237
e.
Overlap with More Specific Criminal
Provisions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 237
f.
Commercial Delivery Services Included. . . . . . . . . . . 240
g.
Pasquantino. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 240
G.
Obstruction of Justice (18 U.S.C. 1503, 1505, 1510,
1512, 1519). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 244
WAR ON CRIMES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 245
A.
Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 245
B.
Reporting Requirements and Avoidance. . . . . . . . . . . . . . . . . . . . . . 247
1.
Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 247
2.
Bank Secrecy Act and CTRs. . . . . . . . . . . . . . . . . . . . . . . . . . 247
3.
Other Reports. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 250
a.
Other CTRs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 250
b.
FBARs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 251
c.
The New Form 1040 Form 8938. . . . . . . . . . . . . . . . . 258
C.
Money Laundering. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 260
1.
Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 260
- xi -
2.
D.
1956 Money Laundering. . . . . . . . . . . . . . . . . . . . . . . . . . . . 261

a.
Transaction Money Laundering. . . . . . . . . . . . . . . . . 261
b.
Transportation Money Laundering. . . . . . . . . . . . . . 265
c.
Sting Operations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 265
3.
1957 Money Laundering. . . . . . . . . . . . . . . . . . . . . . . . . . . . 265
a.
Introductory Comment. . . . . . . . . . . . . . . . . . . . . . . . 265
b.
Key Elements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 266
4.
Overlap. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 266
5.
Conspiracy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 266
6.
Materials. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 267
a.
Interface Between Money Laundering and
Tax Crimes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 267
(1)
DOJ Tax Control with Overlapping
Traditional Tax Crimes . . . . . . . . . . . . . . . . . . 267
(2)
Combining of Counts and Fifth
Amendment Issues . . . . . . . . . . . . . . . . . . . . . . 268
7.
A Caveat for Lawyers and Other Professionals. . . . . . . . . . . 269
Federal Money Laundering Investigation and Compliance
Agencies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 270
1.
Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 270
2.
Investigation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 270
a.
Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 270
b.
Treasury. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 270
c.
DOJ. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 272
d.
State Department. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 273
e.
United States Postal Service (USPS). . . . . . . . . . . . 273
f.
Office of National Drug Control Policy. . . . . . . . . . . 274
3.
Compliance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 274
a.
Recordkeeping and Reporting
Requirements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 274
b.
Federal Bank Regulators. . . . . . . . . . . . . . . . . . . . . . . 274
4.
The Securities and Exchange Commission
(SEC).
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 274
5.
Internal Revenue Service. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 275
6.
Commodity Futures Trading Commission
(CFTC). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 275
7.
International Cooperation. . . . . . . . . . . . . . . . . . . . . . . . . . . . 275
CH. 3 - SENTENCING, PLEAS AND RELATED ISSUES. . . . . . . . . . . . . . . . . . . . . . . . . 276

I.
Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 276
II.
Sentencing, Including the Sentencing Guidelines. . . . . . . . . . . . . . . . . . . . . 278
A.
The Sentencing Statute. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 278
B.
Guidelines Introduction and Policies. . . . . . . . . . . . . . . . . . . . . . . . . 280
1.
Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 280
- xii -
2.
3.
4.
C.
D.
E.
F.
Guideline Ranges; Departures; Variances. . . . . . . . . . . . . . . 281

Parole Abolished. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 282
Other Key Features of Sentencing. . . . . . . . . . . . . . . . . . . . . 282
a.
The PSR. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 282
b.
Courts Sua Sponte Consideration of
Departures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 283
c.
The Sentencing Hearing. . . . . . . . . . . . . . . . . . . . . . . . 283
5.
Conclusion to Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . 285
Power to the Judges the Booker Revolution in
Sentencing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 285
The Guidelines An Overview of the Process. . . . . . . . . . . . . . . . . . 289
Guidelines in Tax Cases - A Simple Example. . . . . . . . . . . . . . . . . . 292
1.
Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 292
2.
Applicable Offense Guideline. . . . . . . . . . . . . . . . . . . . . . . . . 293
3.
Adjustments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 296
4.
Criminal History or Livelihood. . . . . . . . . . . . . . . . . . . . . . . . 296
5.
Application of the Sentencing Table. . . . . . . . . . . . . . . . . . . . 296
6.
Probation and Supervised Release. . . . . . . . . . . . . . . . . . . . . 297
7.
Sentencing Within or Without the Range. . . . . . . . . . . . . . . . 297
8.
Fines and Restitution. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 298
9.
Section 3553(a) - Booker and Its Progeny. . . . . . . . . . . . . 298
10.
Conclusion. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 299
Some Issues in Sentencing Relevant to Criminal Tax
Cases. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 300
1.
The Tax System in the Sentencing Equation. . . . . . . . . . . . . 300
2.
More on Booker. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 302
3.
The Chapter Two Offense Level. . . . . . . . . . . . . . . . . . . . . . . 304
a.
Tax Loss Numbers. . . . . . . . . . . . . . . . . . . . . . . . . . . . 304
(1)
General. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 304
(2)
Unclaimed Deductions. . . . . . . . . . . . . . . . . . . 307
(a)
Filed Original. . . . . . . . . . . . . . . . . . . . 307
(b)
Failure to File. . . . . . . . . . . . . . . . . . . . 312
(3)
Corporate Diversions to
Shareholders. . . . . . . . . . . . . . . . . . . . . . . . . . . 314
(a)
The Unclaimed Deduction
Issue. . . . . . . . . . . . . . . . . . . . . . . . . . . . 314
(b)
The Dividend Issue. . . . . . . . . . . . . . . . 314
(4)
Timing Issues . . . . . . . . . . . . . . . . . . . . . . . . . . 315
(5)
Tax Loss Numbers In Conspiracies.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 317
b.
FBAR Violations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 317
4.
Acceptance of Responsibility. . . . . . . . . . . . . . . . . . . . . . . . . . 324
5.
Conspiracy Enhancements. . . . . . . . . . . . . . . . . . . . . . . . . . . . 327
6.
Consecutive or Concurrent Sentences; Stacking. . . . . . . . . . 327
- xiii -
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
To Group or Not to Group - That is a Question. . . . . . . . . . 328

Relevant Conduct. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 332
Obstruction of Justice. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 340
Organizer or Leader. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 341
Abuse of Position of Trust. . . . . . . . . . . . . . . . . . . . . . . . . . . . 342
Restitution. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 344
a.
General. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 344
b.
Restitution in Tax Cases. . . . . . . . . . . . . . . . . . . . . . . . 346
Fines. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 353
Costs of Prosecution. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 355
Sentencing Within the Range and Departures. . . . . . . . . . . . 356
a.
Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 356
b.
Factors That May or May Not Be
Considered. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 357
(1)
Diminished Capacity. . . . . . . . . . . . . . . . . . . . . 357
(2)
Voluntary Disclosure. . . . . . . . . . . . . . . . . . . . 357
(3)
Aberrant Behavior. . . . . . . . . . . . . . . . . . . . . . 357
(4)
Dismissed or Uncharged Conduct. . . . . . . . . . 358
(5)
Age. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 358
(6)
Educational and Vocational Skills. . . . . . . . . . 358
(7)
Physical Condition. . . . . . . . . . . . . . . . . . . . . . 358
(8)
Family Ties and Responsibilities. . . . . . . . . . . 358
(9)
Race, Sex, National Origin, Creed,
Religion and Socio-Economic
Statutes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 359
(10) Effect of Booker. . . . . . . . . . . . . . . . . . . . . . . . 359
c.
Sentencing Within the Ranges. . . . . . . . . . . . . . . . . . . 359
d.
Sentencing Outside the Ranges -- To
Depart or Not to Depart. . . . . . . . . . . . . . . . . . . . . . . . 359
(1)
Substantial Assistance Departures. . . . . . . . . 359
(2)
Other Guidelines Departures . . . . . . . . . . . . . 362
(3)
Legislative Restriction. . . . . . . . . . . . . . . . . . . 363
e.
Non-Guideline / Booker Variances for
Cooperation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 364
f.
Rule 35 Departures . . . . . . . . . . . . . . . . . . . . . . . . . . . 364
g.
Proportionality Among Crimes - Departure
by Grouping Down. . . . . . . . . . . . . . . . . . . . . . . . . . . . 365
The One Book Rule and Ex Post Facto Issues. . . . . . . . . . . . 365
a.
Pre-Booker. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 365
b.
Post-Booker Ex Post Facto Irrelevant? . . . . . . . . . 366
The Presentence Investigation Report (PSR). . . . . . . . . . . 366
Sentencing Hearing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 367
Sentencing -- The Rubber Hits the Road. . . . . . . . . . . . . . . . 369
a.
The Booker Variance Process. . . . . . . . . . . . . . . . . . . 369
- xiv -
III.
IV.
b.
The Sentencing Process. . . . . . . . . . . . . . . . . . . . . . . . 371
20.
Incarceration or Bail Pending Sentencing or
Appeal. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 371
21.
Appeal. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 371
22.
Good Time Credits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 373
Pleas and Plea Negotiations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 373
A.
The Plea Agreement. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 373
1.
Importance of Plea Agreements. . . . . . . . . . . . . . . . . . . . . . . 373
2.
Nature of Plea Agreements. . . . . . . . . . . . . . . . . . . . . . . . . . . 374
a.
The Contract. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 374
b.
The Market Analogy. . . . . . . . . . . . . . . . . . . . . . . . . . . 375
c.
Some Applications. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 375
B.
Federal Rules of Criminal Procedure Provisions. . . . . . . . . . . . . . . 380
1.
Types of Pleas. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 380
2.
Guilty Plea Must be Knowing. . . . . . . . . . . . . . . . . . . . . . . . . 381
3.
The Court Must Determine the Factual Basis for
Guilt. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 381
4.
Court May Reject Plea Agreement. . . . . . . . . . . . . . . . . . . . . 382
C.
Relevant Sentencing Guidelines. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 383
D.
Plea Bargaining Under the Guidelines . . . . . . . . . . . . . . . . . . . . . . . . 383
E.
DOJ Tax Plea Policies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 386
F.
Expedited Plea Program. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 388
G.
Proffers and Negotiating Pleas. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 389
1.
Proffers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 389
2.
Other Aspects of Negotiating the Plea. . . . . . . . . . . . . . . . . . 393
H.
Pleas and Appeals. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 394
I.
Pleas and Guidelines Calculations. . . . . . . . . . . . . . . . . . . . . . . . . . . . 394
J.
Withdrawing Guilty Pleas. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 395
K.
Collateral Consequences of Plea Agreements and
Allocutions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 396
Lesser Included Offenses; Doctrine of Merger; Joinder. . . . . . . . . . . . . . . . 396
A.
Introduction to the Lesser Included Offense Concept. . . . . . . . . . . 396
B.
The Lesser Included Offense Charge - An Alternative to
Guilt or Acquittal. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 397
1.
Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 397
2.
Federal Rule. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 398
3.
Sansone and the Elements Test for Lesser Included
Offense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 399
4.
Lesser Included Offense Charge. . . . . . . . . . . . . . . . . . . . . . . 406
5.
Tax Division Policy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 407
6.
Strategies on Lesser Included Offense. . . . . . . . . . . . . . . . . . 409
7.
Sentencing Guidelines Considerations. . . . . . . . . . . . . . . . . . 410
C.
Merger. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 410
D.
Double Jeopardy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 412
- xv -
E.
Joinder. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 413
CH. 4 - OTHER CONSEQUENCES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 416

I.
Forfeiture. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 416
A.
Introduction to Forfeiture and its Role in the Federal Tax
Crimes Universe. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 416
B.
General Federal Forfeiture Rules. . . . . . . . . . . . . . . . . . . . . . . . . . . . 417
1.
Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 417
2.
Civil forfeiture. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 417
3.
Criminal Forfeiture. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 420
C.
Internal Revenue Code Forfeiture. . . . . . . . . . . . . . . . . . . . . . . . . . . 423
1.
The Statutes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 423
2.
IRC Forfeiture Generally. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 424
3.
Proceeds and Tracing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 424
4.
Types of Assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 424
5.
Procedures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 425
D.
Attorneys Fees Forfeitures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 425
E.
IRS Role in Forfeitures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 428
F.
Tax Considerations Related to Forfeitures. . . . . . . . . . . . . . . . . . . . 428
II.
Civil Disabilities Arising from Conviction. . . . . . . . . . . . . . . . . . . . . . . . . . . 428
III.
Immigration Matters Arising from Conviction. . . . . . . . . . . . . . . . . . . . . . . 429
IV.
Civil Tax Considerations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 431
A.
Relationship of Criminal and Civil IRS Functions. . . . . . . . . . . . . . 431
1.
During the Investigation and Prosecution Phase. . . . . . . . . . 431
a.
Historically Criminal Function Takes
Precedence. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 431
b.
Development - Parallel Proceedings /
Investigations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 431
2.
Civil Considerations after Criminal Case. . . . . . . . . . . . . . . 433
3.
Investigations That Identify Criminal Potential. . . . . . . . . . 433
a.
Civil Enforcement - Audit and Collection
Activity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 433
b.
General Investigation (GI) Programs. . . . . . . . . . . 434
B.
Penalties. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 434
1.
Civil Fraud Penalty. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 434
2.
Failure to File. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 441
3.
Other Penalties. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 441
C.
Civil Statutes of Limitation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 441
D.
Civil Tax Liability and Pleas. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 443
E.
Grand Jury Material and Civil Tax Liability. . . . . . . . . . . . . . . . . . 444
V.
Vocational Disabilities and Discipline for Tax Crimes. . . . . . . . . . . . . . . . . 444
A.
Professional Discipline. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 444
B.
Disbarment to Practice Before the IRS. . . . . . . . . . . . . . . . . . . . . . . . 445
C.
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 445
- xvi -
VI.
VII.
Publicity / Press Releases. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 445

Contract Violations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 448
CH. 5 - STATUTES OF LIMITATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 450

I.
Tax Crimes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 450
A.
Statute. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 450
B.
Materials. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 451
1.
General Statute of Limitations Concepts. . . . . . . . . . . . . . . . 451
2.
The Statutes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 451
3.
Affirmative Acts in Tax Evasion. . . . . . . . . . . . . . . . . . . . . . . 452
4.
Event that Starts Statute Running. . . . . . . . . . . . . . . . . . . . . 454
a.
General. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 454
b.
Tax Crimes Related to a Filed Return. . . . . . . . . . . . 454
c.
Failure to File. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 456
5.
Suspension and Tolling. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 456
6.
Continuing Offense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 458
II.
Title 18 Offenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 459
A.
Statute. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 459
B.
Materials. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 460
1.
Conspiracies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 460
a.
General. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 460
b.
Crime Outside Statute; Overt Act Within. . . . . . . . . 460
c.
Overt Act Outside Statute and Crime
Within. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 463
2.
Additional Materials on Tolling. . . . . . . . . . . . . . . . . . . . . . . 463
a.
Summons. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 463
b.
Foreign Country Evidence. . . . . . . . . . . . . . . . . . . . . . 463
3.
Superseding Indictments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 467
III.
Chart of Statutes of Limitations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 468
CH. 6 - VENUE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 470
I.
General Venue Concepts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 470
A.
General Rule - Where Crime Committed. . . . . . . . . . . . . . . . . . . . . . 470
B.
Proper Venue is an Element that the Government Must
Prove at Trial. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 470
C.
Continuing Offenses - Acts in Multiple Districts. . . . . . . . . . . . . . . . 471
D.
Transfer for Convenience of Parties and Interests of
Justice. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 471
II.
Venue in Tax Cases. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 471
A.
Tax Crimes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 471
B.
Government Burden to Establish Venue. . . . . . . . . . . . . . . . . . . . . . 474
C.
Waiver of Venue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 474
D.
Motion to Transfer Venue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 474
E.
DOJ Tax Policies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 474
- xvii -
III.
Starting Point for Further Research. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 475
CH. 7 - ENFORCEMENT STRATEGIES, POLICIES AND PRACTICES . . . . . . . . . . . 476

I.
Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 476
II.
Getting in the Governments Cross-Hairs. . . . . . . . . . . . . . . . . . . . . . . . . . . 476
III.
CI Compliance Strategies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 477
A.
The Mission Statement. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 477
B.
Statistics. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 478
C.
Legal Source Cases. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 480
1.
Renewed Focus on Legal Source Cases. . . . . . . . . . . . . . . . . . 480
2.
Specific Legal Source Initiatives. . . . . . . . . . . . . . . . . . . . . . . 482
a.
Nonfiler Enforcement Program. . . . . . . . . . . . . . . . . . 482
b.
Employment Tax Enforcement Program. . . . . . . . . . 482
c.
Abusive Trust Schemes. . . . . . . . . . . . . . . . . . . . . . . . 482
D.
Illegal Source Cases. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 482
E.
Narcotics Cases. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 482
IV.
Standards for Prosecuting Tax Crimes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 483
A.
Introduction to the Process. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 483
B.
Standards for Tax Crimes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 484
V.
DOJ Tax Control of the Criminal Enforcement System. . . . . . . . . . . . . . . . 485
VI.
Conferences. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 491
A.
CI Conferences. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 491
B.
DOJ Tax Conferences. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 492
C.
Conferences with AUSA. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 493
D.
Target Attendance; Admissions and Vicarious
Admissions; Leads. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 493
E.
No Right to a Conference. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 494
VII. Deferring Completion of Civil Tax Initiatives. . . . . . . . . . . . . . . . . . . . . . . . 495
A.
General. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 495
B.
Civil Settlements in Plea Agreements. . . . . . . . . . . . . . . . . . . . . . . . . 495
VIII. Prosecutorial Discretion Policies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 495
A.
Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 495
B.
DOJ Charging and Plea Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . 496
1.
General DOJ Policies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 496
2.
DOJ Tax Policies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 498
a.
General. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 498
b.
Sentencing Policies. . . . . . . . . . . . . . . . . . . . . . . . . . . . 499
(1)
Incarceration. . . . . . . . . . . . . . . . . . . . . . . . . . . 499
(2)
Departures and Variances. . . . . . . . . . . . . . . . 500
C.
DOJ Policies on Charging Corporations and Other
Entities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 500
D.
Dual Prosecution and Successive Prosecution. . . . . . . . . . . . . . . . . . 504
E.
Health Policies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 504
- xviii -
CH. 8 - INFORMATION GATHERING TECHNIQUES . . . . . . . . . . . . . . . . . . . . . . . . . . 505

I.
Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 505
II.
Section 6103 - What the IRS Already Knows and Its Limits. . . . . . . . . . . . 505
III.
Cooperating Witness Techniques. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 505
IV.
Compulsory Evidence Gathering Techniques. . . . . . . . . . . . . . . . . . . . . . . . 506
A.
The IRS Administrative Summons. . . . . . . . . . . . . . . . . . . . . . . . . . . 506
1.
Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 506
2.
The General Summons. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 507
a.
Scope and Purpose. . . . . . . . . . . . . . . . . . . . . . . . . . . . 507
b.
Song and Dance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 510
c.
Remedies for Failure to Comply. . . . . . . . . . . . . . . . . 511
3.
Third Party Summons. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 513
4.
John Doe Summons. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 514
5.
Referral to DOJ Tax. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 517
6.
Summons Pursuant to Tax Treaties. . . . . . . . . . . . . . . . . . . . 519
B.
Search Warrants. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 519
1.
General. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 519
2.
General Practices. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 520
3.
Emails and Search Warrants. . . . . . . . . . . . . . . . . . . . . . . . . . 521
4.
Remedies for Improper Searches and Seizures . . . . . . . . . . 522
C.
The Grand Jury Investigation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 522
1.
Introduction to the Grand Jury. . . . . . . . . . . . . . . . . . . . . . . . 522
2.
The Grand Jury Subpoena. . . . . . . . . . . . . . . . . . . . . . . . . . . . 525
3.
Target or Subject Appearance Before the Grand
Jury. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 528
4.
Assertion of the Fifth Amendment in Grand Jury
Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 529
5.
Grand Jury Secrecy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 530
6.
Grand Jury Investigations in Large Tax Cases. . . . . . . . . . . 531
V.
Sting Operations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 531
VI.
International Evidence Gathering. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 532
A.
Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 532
B.
Prototypical U.S. International Tax Fraud. . . . . . . . . . . . . . . . . . . . 532
C.
Tax Treaties and International Comity. . . . . . . . . . . . . . . . . . . . . . . 533
1.
Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 533
2.
Treaties. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 534
a.
Double Tax Treaty - Information
Exchange.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 534
b.
OECD Convention on Tax Administrative
Assistance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 534
c.
MLATs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 535
d.
TIEAs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 536
(1)
Caribbean Basin Initiative. . . . . . . . . . . . . . . . 536
(2)
Other TIEAs. . . . . . . . . . . . . . . . . . . . . . . . . . . 537
- xix -
e.
D.
E.
IRS Summonses and the Hague

Convention. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 538
3.
Letters Rogatory. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 538
a.
General. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 538
b.
By a Foreign Country To the United States.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 538
c.
By the United States to a Foreign Country.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 539
4.
Other Means. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 539
5.
Reminder on the Governments Unilateral Statute
of Limitations Extension Gambit. . . . . . . . . . . . . . . . . . . . . . 540
Other Techniques. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 540
Civil Tax Considerations of Foreign Evidence. . . . . . . . . . . . . . . . . . 541
CH. 9 - MITIGATING THE DAMAGE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 542

I.
Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 542
II.
Privileges Hiding the Ball. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 542
A.
Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 542
B.
Privileges in the Federal Universe. . . . . . . . . . . . . . . . . . . . . . . . . . . . 543
C.
Fifth Amendment Privilege. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 543
1.
The Privilege. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 544
2.
The Return Filing Dilemma. . . . . . . . . . . . . . . . . . . . . . . . . . . 544
a.
Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 544
b.
Fifth Amendment Returns. . . . . . . . . . . . . . . . . . . . . . 546
c.
Selective Assertion on Returns. . . . . . . . . . . . . . . . . . 549
d.
Filing No Return. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 549
(1)
General. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 549
(2)
Current Year Returns During
Criminal Investigation. . . . . . . . . . . . . . . . . . . 550
e.
The Attorneys Role in Client Choices. . . . . . . . . . . . 552
3.
Voluntary Disclosure. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 552
a.
Introduction to the Concept of Voluntary
Disclosure. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 552
b.
IRS Voluntary Disclosure Policy. . . . . . . . . . . . . . . . . 554
(1)
The Practice. . . . . . . . . . . . . . . . . . . . 554
(2)
How Is Disclosure Made? . . . . . . . . . . 557
(3)
Which Type of Disclosure is
Better? . . . . . . . . . . . . . . . . . . . . . . . . 559
c.
DOJ Tax Disclosure Policy. . . . . . . . . . . . . . . . . . . . . . 560
d.
Does the Voluntary Disclosure Practice
Confer Rights? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 561
e.
Timeliness,
Truthfulness
and
Completeness. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 562
f.
Taxpayer Cooperation. . . . . . . . . . . . . . . . . . . . . . . . . 562
- xx -
g.
4.
5.
6.
Events That Prevent Timeliness or

Voluntariness. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 564
h.
Special Voluntary Disclosure Initiatives. . . . . . . . . . . 564
(1)
Earlier Offshore Voluntary
Compliance Initiative (and Related
Audit Initiatives). . . . . . . . . . . . . . . . . . 564
(2)
Tax Shelter Initiatives. . . . . . . . . . . . . 565
(3)
2009 Offshore Account Initiative. . . . . 565
(4)
2011 Voluntary Compliance
Initiative (OVDI) . . . . . . . . . . . . . . . 566
(5)
Current Voluntary Disclosure for
Offshore Accounts. . . . . . . . . . . . . . . . . 566
(6)
Opting Out of OVDP and OVDI
(Including Extended OVDI). . . . . . . . . 567
Investigation Phase. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 568
a.
Taxpayer Interviews and Modified
Miranda Warnings. . . . . . . . . . . . . . . . . . . . . . . . . . . . 568
(1)
Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . 568
(2)
The Caceres Doctrine. . . . . . . . . . . . . . . . . . . . 572
(3)
Are Warnings Required? . . . . . . . . . . . . . . . . 573
b.
Current Year Returns. . . . . . . . . . . . . . . . . . . . . . . . . 575
Trial Phase. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 575
Scope Issues. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 575
a.
Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 575
b.
The Fifth Amendment and Documents. . . . . . . . . . . . 576
c.
Immunity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 590
(1)
Types of Immunity. . . . . . . . . . . . . . . . . . . . . . 590
(a)
Transactional Immunity. . . . . . . . . . . . 590
(b)
Derivative Use Immunity. . . . . . . . . . . 591
(c)
Use Immunity. . . . . . . . . . . . . . . . . . . . 591
(2)
Statutory Immunity. . . . . . . . . . . . . . . . . . . . . 592
(3)
Non-Statutory Immunity by
Contract. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 596
(4)
Securing the Benefit of Immunity Kastigar. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 599
(5)
Is Kastigar Limited to Compelled
Testimony? . . . . . . . . . . . . . . . . . . . . . . . . . . . . 606
d.
Prosecution Selective Grant of Immunity. . . . . . . . . 606
e.
Other Scope Issues. . . . . . . . . . . . . . . . . . . . . . . . . . . . 608
(1)
Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . 608
(2)
Consent Directives. . . . . . . . . . . . . . . . . . . . . . 608
(3)
Compulsory Process for Foreign
Documents. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 614
(4)
Fear of Foreign Prosecution. . . . . . . . . . . . . . . 615
- xxi -
D.
III.
IV.
Accountant Privilege. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 616

1.
Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 616
2.
Arthur Young. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 617
3.
The New Tax Practitioner Privilege (FATP). . . . . . . . . . . 621
E.
Attorney-Client Privilege. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 622
1.
Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 622
2.
Attorney-Client Privilege in a Corporate Setting. . . . . . . . . 624
a.
General - the Upjohn Case. . . . . . . . . . . . . . . . . . . . . . 624
b.
Problems in Internal Investigations. . . . . . . . . . . . . . 626
3.
The Limits of the Privilege. . . . . . . . . . . . . . . . . . . . . . . . . . . . 627
a.
Identity Privilege. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 627
b.
Crime-Fraud Exception. . . . . . . . . . . . . . . . . . . . . . . . 632
4.
Legal v. Tax Preparation Work. . . . . . . . . . . . . . . . . . . . . . . . 633
5.
Kovelizing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 643
F.
Work Product Privilege. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 645
G.
Spousal Privileges. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 652
1.
General Justification for Spousal Privilege. . . . . . . . . . . . . . 652
2.
Spousal Communications Privilege. . . . . . . . . . . . . . . . . . . . . 652
3.
Spousal Immunity (aka Adverse Testimony
Privilege). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 653
4.
Examples. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 654
H.
Joint Defense Agreements (JDAs). . . . . . . . . . . . . . . . . . . . . . . . . . 655
1.
Theory of JDAs Extension of Attorney-Client
Privilege. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 655
2.
Types of JDAs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 658
3.
The Parties Interests Must be Common. . . . . . . . . . . . . . 659
4.
Risk of Government Discovery and Use of JDA
Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 660
5.
Risks Related to Trial Use of JDA Information. . . . . . . . . . . 661
I.
DOJ Policies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 662
1.
DOJ Policy for Corporate Prosecutions. . . . . . . . . . . . . . . . . 662
2.
Other Privilege Policies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 662
Capitalizing on the Governments Mistakes. . . . . . . . . . . . . . . . . . . . . . . . . 663
A.
Fourth and Fifth Amendment Rights. . . . . . . . . . . . . . . . . . . . . . . . . 663
B.
Violation of Government Procedures. . . . . . . . . . . . . . . . . . . . . . . . . 672
C.
Selective Enforcement Defense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 672
Discovery of the Governments Case. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 674
A.
The Problem . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 674
B.
Practitioner Vigilance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 674
C.
Administrative Disclosures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 674
D.
Freedom of Information Act. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 674
E.
Trial Discovery. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 676
1.
Federal Rules of Criminal Procedure. . . . . . . . . . . . . . . . . . . 676
2.
Brady and Related Material. . . . . . . . . . . . . . . . . . . . . . . . . . 677
- xxii -
a.
b.
c.
V.
Brady and Giglio. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 677

Jencks Act. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 679
Combined Brady and Jencks Act
Materials. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 679
d.
Tough Calls on Disclosure. . . . . . . . . . . . . . . . . . . . . . 679
e.
Open File Policy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 680
f.
The Document Dump Via Open File. . . . . . . . . . . . . . 680
g.
Disclosures and the Plea Bargain Process. . . . . . . . . 682
h.
ABA Model Rule 3.8(d) . . . . . . . . . . . . . . . . . . . . . . . . 683
i.
Remedies for Brady and Related
Violations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 685
3.
Henthorn Requests. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 685
F.
The Civil Case Gambit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 685
G.
Shifting the Responsibility. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 686
Delay in Obtaining Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 688
CH. 10 - PROOF ISSUES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 689

I.
Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 689
II.
Threshold Burden of Proof Issues. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 689
A.
Presumption of Innocence and Guilt Beyond a Reasonable
Doubt. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 689
B.
Shifting Burden? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 695
III.
Direct or Specific Items Method. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 698
IV.
Indirect Methods. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 699
A.
Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 699
B.
Indirect Methods. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 700
1.
Net Worth Method. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 700
a.
General. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 700
b.
The Trial Drill In Summary. . . . . . . . . . . . . . . . . . . 705
c.
The Leads Investigation and Supplying
Leads. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 706
d.
An Example the Cash Hoard Defense. . . . . . . . . . . 707
2.
Bank Deposits/Cash Expenditures Method. . . . . . . . . . . . . . 708
3.
Other Indirect Methods. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 709
C.
A Reprise on Methods. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 710
D.
Defense Strategies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 713
V.
The IRS Agent as Witness - Summary, Overview and Expert. . . . . . . . . . 714
A.
Differentiating The Roles. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 714
B.
The Summary Witness. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 718
1.
General. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 718
a.
Admitted Evidence. . . . . . . . . . . . . . . . . . . . . . . . . . . . 718
b.
Quasi-admitted or Admissible but not
Admitted Evidence. . . . . . . . . . . . . . . . . . . . . . . . . . . . 721
2.
Overview Witness. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 727
- xxiii -
VI.
VII.
C.
The Expert Witness. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 728
404(b) Evidence. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 734
Other Proof Issues. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 739
A.
Presumptions and Related Matters. . . . . . . . . . . . . . . . . . . . . . . . . . . 739
B.
Hearsay and Right to Confront. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 748
1.
General. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 748
2.
Example - Proving Tax Due and Owing. . . . . . . . . . . . . . . . . 750
CH. 11 - THE PROCESS A TO Z . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 754

I.
Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 754
II.
Criminal Investigations to Initial Contact. . . . . . . . . . . . . . . . . . . . . . . . . . . 754
A.
After Return Filing But Before Audit. . . . . . . . . . . . . . . . . . . . . . . . . 754
B.
The Eggshell Civil Tax Audit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 755
C.
The CI Phase. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 758
1.
The Players. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 758
a.
Special Agent. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 758
b.
Civil Agent. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 758
c.
Counsel. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 758
d.
Role of DOJ Tax. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 759
2.
Taxpayer Interviews. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 759
a.
The Initial Surprise Interview. . . . . . . . . . . . . . . . . . . 759
b.
Other Taxpayer Interviews. . . . . . . . . . . . . . . . . . . . . 761
D.
Witnesses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 761
E.
Documents. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 761
1.
The Taxpayers Documents . . . . . . . . . . . . . . . . . . . . . . . . . . 761
2.
Third Party Documents. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 762
F.
Vicarious Admissions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 762
G.
Concluding the Investigation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 763
1.
Recommending Criminal Prosecution. . . . . . . . . . . . . . . . . . 763
2.
The Special Agents Report. . . . . . . . . . . . . . . . . . . . . . . . . . . 763
3.
The CI Conference. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 764
4.
DOJ Referral. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 764
III.
Processing the Criminal Case to Indictment. . . . . . . . . . . . . . . . . . . . . . . . . 765
A.
Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 765
B.
Department of Justice Consideration. . . . . . . . . . . . . . . . . . . . . . . . . 766
1.
Main Justice (DOJ Tax CES). . . . . . . . . . . . . . . . . . . . . . . . . 766
2.
AUSA. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 766
C.
Grand Jury. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 767
D.
Special Considerations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 768
1.
Plea Bargaining. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 768
2.
Immunity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 768
IV.
Indictment to Trial. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 768
A.
Charging. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 768
1.
Indictment or Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . 768
- xxiv -
V.
2.
Complaint. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 771
3.
Arrest or Summons for Initial Appearance. . . . . . . . . . . . . . 771
4.
Miscellaneous. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 771
B.
Pre-Arraignment Issues. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 772
C.
Initial Appearance and Arraignment. . . . . . . . . . . . . . . . . . . . . . . . . 772
D.
Pre-trial Matters. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 773
1.
Motions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 773
2.
Discovery. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 774
a.
Limited Discovery. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 774
b.
Prosecutors Open File Policy. . . . . . . . . . . . . . . . . . . 775
(1)
The Concept and General Practice.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 775
(2)
Massive Document Dumps. . . . . . . . . . . . . . . . 776
3.
Other Matters. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 778
4.
Local Rules. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 778
E.
Judge or Jury Trial. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 778
Trial. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 780
A.
Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 780
B.
Focus on the Theme of the Case. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 781
1.
Rules concerning themes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 781
2.
Examples of Themes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 781
3.
Be (or Appear to Be) Reasonable to the Judge and
Jury. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 782
4.
Make the Defendant a Sympathetic Figure. . . . . . . . . . . . . . 782
C.
Trier of fact. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 782
1.
Judge. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 782
a.
Judge Selection. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 782
b.
Influencing the Judges Discretion. . . . . . . . . . . . . . . 783
c.
District Selection. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 783
2.
Jury. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 783
a.
Right to Jury Trial. . . . . . . . . . . . . . . . . . . . . . . . . . . . 783
b.
Number of Jurors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 784
c.
Jury Selection. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 784
d.
Opening Instructions for Context. . . . . . . . . . . . . . . . 784
D.
Burden of Proof. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 788
E.
Witnesses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 788
1.
Government Witnesses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 788
a.
IRS Agent as Summary and/or Expert
Witness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 788
b.
Other Government Witnesses. . . . . . . . . . . . . . . . . . . 789
2.
Defense Witnesses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 789
a.
Defense Summary Witnesses. . . . . . . . . . . . . . . . . . . . 789
b.
Defendant as Witness. . . . . . . . . . . . . . . . . . . . . . . . . . 789
F.
Time Line for Trial. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 789
- xxv -
1.
Opening - The Introduction to the Case. . . . . . . . . . . . . . . . . 789

a.
Judges Instructions. . . . . . . . . . . . . . . . . . . . . . . . . . . 789
b.
Parties Opening Statements. . . . . . . . . . . . . . . . . . . . . 790
2.
Governments Case. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 790
a.
Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 790
b.
Example of Evidence Issues. . . . . . . . . . . . . . . . . . . . . 790
3.
Motion for Judgment of Acquittal. . . . . . . . . . . . . . . . . . . . . 791
4.
Defendants Case. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 791
5.
Governments Rebuttals. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 792
6.
Closing Argument. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 792
7.
Instructions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 792
a.
Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 792
b.
Charge Specific Instructions. . . . . . . . . . . . . . . . . . . . 792
c.
General charges. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 793
(1)
Introductory Charges. . . . . . . . . . . . . . . . . . . . 793
(2)
Duty to Follow Instructions. . . . . . . . . . . . . . . 793
(3)
Presumption of Innocence. . . . . . . . . . . . . . . . 793
(4)
Excluding NonEvidence. . . . . . . . . . . . . . . . . . 794
(5)
Direct and Circumstantial
Evidence. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 794
(6)
Witness Credibility. . . . . . . . . . . . . . . . . . . . . . 795
(7)
Character Evidence. . . . . . . . . . . . . . . . . . . . . 796
(8)
Impeachment
Prior
Inconsistencies. . . . . . . . . . . . . . . . . . . . . . . . 796
(9)
Consider Only Crime Charged. . . . . . . . . . . . 797
(10) Judge Imposes Punishment. . . . . . . . . . . . . . . 797
(11) Multiple Counts. . . . . . . . . . . . . . . . . . . . . . . . . 797
d.
Specialized Charges. . . . . . . . . . . . . . . . . . . . . . . . . . . 797
e.
Government Risk on Charges. . . . . . . . . . . . . . . . . . . 798
8.
The Verdict. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 799
9.
Abuses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 799
VI.
Post-Trial. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 800
A.
Post-Trial Motions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 800
B.
Pre-Sentence Investigation Report. . . . . . . . . . . . . . . . . . . . . . . . . . . 800
C.
Sentencing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 801
D.
Appeal. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 801
E.
Post-Appeals Remedies (Collateral Attacks;
Expungement). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 801
VII. Relief for the Acquitted. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 804
A.
Attorneys Fees - The Hyde Amendment. . . . . . . . . . . . . . . . . . . . . . . 804
B.
Certificate of Innocence and Damages. . . . . . . . . . . . . . . . . . . . . . . . 805
VIII. Incarceration. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 806
IX.
When All Else Fails The Presidential Pardon. . . . . . . . . . . . . . . . . . . . . . . 807
- xxvi -
CH. 12 - SOME POLICY ISSUES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 812

I.
Statistics and Policies Reflected in Statistics. . . . . . . . . . . . . . . . . . . . . . . . . 812
II.
Federal Tax Amnesty. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 812
III.
Causes of Criminal Tax Behavior. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 813
APPENDIX A - RESOURCES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 816
APPENDIX B - GLOSSARY OF ACRONYMS, INITIALISMS & SHORT-HANDISMS
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 818
- xxvii -
CH. I INTRODUCTION
I.
Scope of the Materials.
This text focuses principally upon the interface of our federal tax system with the criminal
justice system. The focus is upon federal tax crimes enumerated in the Internal Revenue Code of
1986 (Code).11 The text also deals with tax crimes frequent companion crimes -- such as, Title
18 U.S.C. offenses for aiding and abetting ( 2), conspiracy ( 371) and false statements ( 1001).
These crimes are often charged with or in lieu of the traditional tax crimes and, in the tax context,
support the goals of the criminal tax enforcement system.
The text also deals with crimes arising from what I refer to as the Governments War on
Crime. Reacting to concerns about drug trafficking and organized crime, Congress enacted laws -illustrated by money laundering provisions -- to attack the profit in that type of criminal conduct.
Money laundering is the process by which criminals disguise and use the proceeds of crime in ways
to avoid detection and prosecution of the underlying crime. Thus, players in the illegal drug
economy may push their profits (usually in the form of cash) through legitimate businesses in order
to provide seemingly legitimate sources for the funds. Typically, critical components of these
laundering attempts will involve financial institutions. The money laundering laws impose upon
financial institutions and businesses reporting requirements for cash transactions, criminal penalties
for nonfiling or avoiding reporting, and criminal penalties for certain financial transactions in the
proceeds of the types of criminal conduct that concerned Congress. The focus of these crimes is
usually not tax enforcement, but other criminal priorities such as drug trafficking and organized
crime.
There is, of course, a connection between these other crimes and tax crimes. Where there
are illegal sources (particularly for drug trafficking and organized crime), the participants often
desire not only to hide their criminal conduct by some form of money laundering but also to avoid
paying tax on their profits. After all, if they want to hide their illegal activity and income from law
enforcement, they are not going to want to report their tax liabilities which requires that they report
the illegal income. The IRS considers money laundering to be tax evasion in progress.12 Hence,
the federal tax system has an interest in the major nontax crimes.
The IRS has historically been the chief enforcer of the criminal tax laws. The IRS has
developed unique financial skills in investigating sophisticated tax crimes. These skills are
11
Throughout this book, references to Sections will be to the Internal Revenue Code
(26 U.S.C.) unless otherwise noted.
12
Quoted from TIGTA, The Criminal Investigation Function Provides Adequate
Guidance to Field Offices for Money Laundering Investigations, Report No. 2002-10-150 (8/21/02).
The IRS likes this catchy phrase and repeats it for emphasis, particularly when justifying its
enforcement efforts against money laundering E.g., Richard Speier, IRS Civil and Criminal
Enforcement Statement, reproduced at 2006 TNT 8-31 (1/11/06); see also Martin A. Sullivan, Sex,
Drugs and Tax Evasion, 115 Tax Notes 1098 (June 18, 2007).
-1-
particularly suited for also investigating the financial schemes that attend money laundering and
other financial crimes related to illegal source income. With the IRSs skills and with its revenue
interest in large sums of untaxed illegal profits, the IRS was a logical player in the enforcement of
the money laundering laws. The IRS is allocated jurisdiction to investigate violations of the money
laundering statutes 18 U.S.C. 1956 and 1957 where the underlying conduct is subject to tax
investigation or the Bank Secrecy Act (BSA).13 Pursuant to this agreement, the IRS plays a key
role in enforcement of the money laundering statutes. In its enforcement efforts focused on money
laundering, IRS agents may act independently or by assignment to organized crime or drug task
forces where these skills are deployed with the skills of other enforcement agencies (such as the FBI
and Customs).
I therefore treat both tax crimes (including the general related crimes such as conspiracy) and
money laundering, including the Bank Secrecy Act reporting requirements, in these materials.
II.
The Criminal Justice System.
Our criminal justice system is multi-faceted. At its most basic level, it punishes conduct that
violates norms imposed by society through criminal laws. But the criminal justice system has
significant goals other than punishment. In the federal system, these various goals are reflected in
the 18 USC 3553 as follows:
(a) Factors To Be Considered in Imposing a Sentence. - The court shall
impose a sentence sufficient, but not greater than necessary, to comply with the
purposes set forth in paragraph (2) of this subsection. The court, in determining the
particular sentence to be imposed, shall consider (1) the nature and circumstances of the offense and the history and
characteristics of the defendant;
(2) the need for the sentence imposed (A) to reflect the seriousness of the offense, to promote respect
for the law, and to provide just punishment for the offense;
(B) to afford adequate deterrence to criminal conduct;
(C) to protect the public from further crimes of the defendant;
and
(D) to provide the defendant with needed educational or
vocational training, medical care, or other correctional treatment in the most
effective manner;
(3) the kinds of sentences available;
(4) the kinds of sentence and the sentencing range established for (A) the applicable category of offense committed by the
applicable category of defendant as set forth in the guidelines issued by the
Sentencing Commission pursuant to section 994(a)(1) of title 28, United States Code,
and that are in effect on the date the defendant is sentenced; or
13
See IRM 1.2.48.3 Order Number 9-2 (Formerly DO-158, Rev. 2) (12-06-2006)
(authorities to agents) and IRM 4.26 Bank Secrecy Act.
-2-
(B) in the case of a violation of probation or supervised

release, the applicable guidelines or policy statements issued by the Sentencing
Commission pursuant to section 994(a)(3) of title 28, United States Code;
(5) any pertinent policy statement issued by the Sentencing
Commission pursuant to 28 U.S.C. 994(a)(2) that is in effect on the date the
defendant is sentenced;
(6) the need to avoid unwarranted sentence disparities among
defendants with similar records who have been found guilty of similar conduct; and
(7) the need to provide restitution to any victims of the offense.
The United States Sentencing Guidelines which I cover in detail in Ch. 3 summarize the goals of
criminal punishment as deterrence, incapacitation, just punishment, and rehabilitation.''14 I do not
enter here the debate of the proper goals of any criminal system and their relative priorities, but take
the lay of the land as I find it. I focus principally upon the punishment aspect, the type of conduct
that attracts punishment, and the ways the practitioner can be of assistance to clients caught up in
the enforcement system. I think it is fair to say that, when you represent a client in the
Governments investigative sights for a crime, your client will be concerned principally, if not
exclusively, with the incapacitation (i.e., incarceration) facet of the sentencing goals and their
implementation. Perhaps, secondarily, he is concerned about the reputational factors from criminal
prosecution and conviction. But you will need to understand how these various goals are factored
through the decision matrix in imposing punishment.
Broader societal issues of criminal law are worthy of study and, I think, important to
understanding the criminal system and criminal tax system that we have. I assume in presenting
these materials that the student will have been introduced to those issues in a basic criminal law
class. This course thus assumes familiarity with the general contours of criminal law and policy.
However, for a reprise of some of the important themes that do echo in the materials in this text,
consider the following:
Richard J. Lazarus, Meeting the Demands of Integration in the Evolution of
Environmental Law: Reforming Environmental Criminal Law, 83 Geo. L.J. 2407,
2441-2445 (1995)15
C. THE AIMS AND IDENTIFYING FEATURES OF CRIMINAL LAW
At some level of abstraction there may be no distinction better known, than
the distinction between civil and criminal law, but in practice the precise dividing
line between the two has become increasingly blurred. Civil sanctions seem more
and more like criminal sanctions in their severity and harshness. Moreover, at the
14
U.S.S.G. Ch. 1, Pt. A2 are the 2010, effective 11/1/10, unless otherwise noted.
I express my gratitude to Professor Julie Sullivan who roughly positions Professor
Lazarus materials quoted here in the same developmental position in her outstanding recent white
collar crime text. Julie R. OSullivan, Federal White Collar Crime 7-10 (West: 2009).
15
-3-
federal level, Congress has virtually criminalized civil law by making criminal
sanctions available for violations of otherwise civil federal regulatory programs. An
estimated 300,000 federal regulations are now subject to criminal enforcement.
Notwithstanding this modern blurring of civil and criminal law, criminal law
retains certain distinguishing core features. The most significant is its sanction, from
which most of criminal law's other features flow. Criminal sanctions are no longer
unique simply because their purpose is to punish; civil sanctions have long included
a punitive dimension (e.g., punitive damages in tort law), which has dramatically
increased with the inclusion of civil penalty provisions (e.g., civil fines) in most
federal regulatory programs. Criminal law's uniqueness instead derives from its
invocation of society's harshest sanctions, including the loss of liberty that results
from incarceration, death, and the moral stigma associated with a criminal
conviction. The long-term effect of this stigma on an individual can be the most
severe. In fact, when applied to corporate entities that cannot be incarcerated, stigma
can be the only meaningful justification for the choice of criminal prosecution rather
than the less socially burdensome option of civil enforcement.
Virtually all of criminal law's distinguishing features derive from the need to
identify the circumstances that justify the use of criminal sanctions. Such
justification entails both carefully defining the human behavior warranting the
sanction, as well as attaching procedural safeguards to the criminal proceeding to
ensure a fair and accurate adjudication of culpability. Moreover, because moral
stigma is one of a criminal conviction's essential features, such careful definitions
and procedural safeguards are critical to the viability of the sanction. For the moral
stigma of the criminal sanction will attach in the long term only if the public is
persuaded both of the moral culpability of the proscribed conduct and of the
reliability of the adjudication of the defendant's guilt. In this respect, the criminal law
exhibits unavoidable circularity: criminality turns on morality, yet morality may
itself turn on criminality. Hence, one of the features that makes criminal law
unique--the moral stigma associated with a criminal conviction--is not
self-executing. It can be lost over time by overreaching.
The defendant's "moral culpability" is the feature most frequently invoked to
justify the severe sanctions of criminal law. What makes conduct more or less
morally culpable turns, in the first instance, on the actor's state of mind. The more
culpable the state of mind, the harsher the corresponding punishment ought to be.
Culpability in this context turns on the defendant's purpose, the extent of the
defendant's knowledge of the circumstances surrounding her conduct, the conduct
itself, its results, and the reasons for the defendant's behavior.
Other major factors contributing to moral culpability include the nature of the
conduct at stake, as well as the kind and amount of resulting harm (either created or
threatened). A morally culpable state of mind alone is generally not considered
-4-
sufficient to warrant criminal sanction; there must be some action (or inaction) in
conjunction with that state of mind. There also usually needs to be some concrete
harm with a public dimension that is realized or threatened as a direct result 176 of
the action. Criminal misconduct is a crime against society; it is not just a private
wrong.
Because of these prerequisites, criminal law is more appropriate for
redressing violations of absolute duties, whereas tort law is better suited for
redressing violations of relative duties. Ideally, criminal standards should be clear
and determinate in defining these duties. Absent clarity, criminal law cannot serve
well its deterrent function. Nor does societal retribution in the form of a criminal
sanction seem fair when society has not given fair notice of what conduct warrants
such an extreme sanction. In addition, clarity indicates that lawmakers have squarely
focused on the propriety of invoking society's most severe sanction in particular
circumstances. There is an "instinctive distaste against men languishing in prison
unless the lawmaker has clearly said they should."
Criminal standards also tend to reflect settled societal norms of conduct,
rather than sharply disputed matters. "Moral" culpability justifies criminal sanction,
which in turn brings the "moral" stigma associated with that form of societal
condemnation. The criminal law, then, seeks principally to reflect morality,
including more newly settled norms, not to create it. Thus, even though the concept
of morality is necessarily elusive and the precise boundary between moral and
immoral conduct inevitably debatable, criminal standards risk losing their legitimate
claim to moral force when they seek to promote certain utilitarian preferences rather
than to condemn conduct that is not morally debatable.
A final distinguishing feature of criminal law is that it imposes a more
exacting burden of proof on the government and otherwise provides the defendant
with significant additional procedural guarantees. The government must establish
the defendant's guilt beyond a reasonable doubt and not, as in civil enforcement
actions, by a mere preponderance of the evidence. Moreover, there are a host of
evidentiary and procedural rules applicable only to criminal proceedings that are
intended to enhance the reliability of the evidence before the factfinder and to
preclude consideration of unduly prejudicial information.16
III.
Introduction to the Criminal Tax System.

A.
The Purpose of the Criminal Tax System.
The criminal tax enforcement system must be understood in the context of the role it plays
in the overall tax system. The tax system raises revenue for the Government. The Government
16
Richard J. Lazarus, supra, 2442-2445.
-5-
could not function if it could not raise revenue.17 Our tax system creates a number of incentives for
taxpayers to participate in the tax system and to pay their tax liabilities as, to paraphrase Justice
Holmes, the cost they pay for a civilized society.18 I deal here principally with the criminal
enforcement incentives, but I also look at some civil penalty enforcement incentives that are frequent
traveling companions with tax crimes.
The Criminal Tax Manual (CTM) explains the role of the criminal tax enforcement system
as follows:
The Government helps to preserve the integrity of this Nation's
self-assessment tax system through vigorous and uniform criminal enforcement of
the internal revenue laws. Criminal prosecutions punish tax law violators and deter
other persons who would violate those laws. To achieve maximum deterrence, the
Government must pursue broad, balanced, and uniform criminal tax enforcement.
Uniformity in tax cases is necessary because tax enforcement potentially affects
more individuals than any other area of criminal enforcement. Broad and balanced
enforcement is essential to effectively deter persons of varying economic and
vocational status, violators in different geographic areas, and different types of tax
law violations.19
Similarly, and more succinctly, the IRS division responsible for investigating tax crimes,
Criminal Investigation (CI), often referred to as the Criminal Investigation Division (CID),20
explains its role as follows:
17
Bull v. United States, 295 U.S. 247, 259 (1935) (taxes are the life-blood of
government, and their prompt and certain availability an imperious necessity)
18
Compania de Tabacos v. Collector, 275 U.S. 87, 100 (1904) (dissenting). Taxes even
have important religious aspects. Jesus famously said that we should Give to Caesar what is
Caesar's, and to God what is God's. Matthew 22:21 (New International Version). Perhaps inspired
by Jesus, Pope Benedict is reported to be preparing a doctrinal pronouncement in his second
encyclical the encyclical being the most authoritative statement the Pope makes -- asserting that
evading taxes is socially unjust. Richard Owen, Pope Set to Declare Income Tax Evasion
Socially Unjust, The Times (8/11/07). Indeed, even before this, the Catholic Church ascribed tax
evasion as a violation of the 7th Commandment, You shall not steal. See Catchism of the Catholic
Church 508 (2005). So there are religious, social and moral imperatives to paying taxes. Alas,
however, I deal in this text only with the legal aspects of paying taxes and obligations such as
reporting taxes related thereto.
19
The quote is actually from the United States Attorneys Manual (USAM) at 6-4.010
(Updated 2007). The quote is however linked from the CTM 2.00 and hence incorporated by
reference.
20
This criminal investigative branch of the IRS was formerly named Criminal
Investigation Division, but the name was shortened to Criminal Investigation. Nevertheless, it is
still often referred to as CID.
-6-
Criminal Investigation serves the American public by investigating potential criminal

violations of the Internal Revenue Code and related financial crimes in a manner that
fosters confidence in the tax system and compliance with the law.21
So, you see that the investigation and prosecution of any particular tax crime has the purpose
of not only punishing the offender, but more importantly of sending a message to the entire
population of taxpayers (or should be taxpayers) to give them the incentive to get right on their tax
responsibilities.
By way of example of criminal tax enforcement priorities, lets consider the genre of cases
involving persons historically known as tax protestors, but now called tax defiers by DOJ Tax.22
DOJ Taxs attempt to change the term is based on the perception that the term tax protestor might
imply in some minds that the person has valid constitutional or other claims; the defier term, DOJ
Tax imagines, is more descriptive because they are just scofflaws. Until I see whether the new term
gains long-term traction, I use the historic term tax protestor. Tax protestors seize (or are sold
or conjure) a variety of arguments -- constitutional, natural law or otherwise -- the net effect of
which, they urge, is to deny the Governments right to tax and, more specifically, to excuse their
failure to report and/or pay tax.23 The courts uniformly reject these arguments. Taxpayers
nevertheless continue to assert them often on the theory or hope that, so long as they can convince
a court that they sincerely held the beliefs, they can play the audit lottery without being subject to
at least the criminal penalties.24 If allowed to proceed undisturbed, these movements can result in
a significant loss of revenue as unwitting and witting participants join the schemes. The IRS must
act and does so both civilly and criminally. This course is a tax crimes course so I focus here on
criminal enforcement in this context. The Government will criminally prosecute the more egregious
offenders and publicize their conviction and sentencing in order to warn others already involved or
contemplating becoming involved in such schemes.
B.
Penalties as Incentives for Compliance; the Audit Lottery.
Since the goal of the tax system is overall tax compliance, penalties are properly viewed as
incentives for compliance or, alternatively, disincentives for noncompliance. The tax system
imposes civil (monetary) penalties for noncompliance and criminal (incarceration, fine and other
punishments) penalties for noncompliance. On a scale of culpability, the criminal penalties are
viewed as the punishment for conduct deemed more offensive to the tax system. I focus in this book
principally on the criminal penalties, but also summarize the civil penalties which almost invariably
travel with (usually after) the taxpayers liability for criminal penalties is resolved.
21
9.1.1.2 Criminal Investigation's Mission (11-04-2004).

See e.g., comments of AAG Nathan Hochman to the Civil and Criminal Penalties
Section at the May 2008 ABA Tax Section Meeting.
23
The various schemes are too numerous to mention, but for a sampling they involve
the use of alleged churches, otherwise tax-exempt, through which to funnel personal income and
assets, so-called common law trusts, etc.
24
We will see this defense in the Cheek case included below, p. 43.
22
-7-
Focusing on the overall goal of compliance, it has been noted that tax crimes running the
risk of the penalties attaching to tax crimes may be viewed from an economic modeling
perspective as a special form of gambling.25 From this perspective, a rational taxpayer will evade
taxes if the expected value of the punishment is lower than the expected gains from evasion.26 If
detection and punishment were certain to occur, there would be virtually no tax evasion, for only
the very stupid and ill-informed would cheat; if detection and punishment were certain not to occur,
the tax system would fail, for only the very stupid and ill-informed or those willing to bear a
disproportionate share of the cost of government would not cheat. Between these extremes, the
system of penalties including criminal penalties that most concern us here is designed to strike
a balance that is appropriate for our society.
Ethically minded citizens realizing that taxes are just a cost of civilized society27 will not
play the audit lottery. Others, however, may be inclined to play the audit lottery based on their
assessments of the risk / reward ratio. As Professor Lederman has noted (based on empirical work
by others), many taxpayers attempting some risk / reward analysis may overstate the risks, thus
25
Leandra Lederman, The Interplay Between Norms and Enforcement in Tax

Compliance, 64 Ohio St. L. J. 1453, 1463 (2003) (quoting Michael W. Spicer, Civilization at a
Discount: The Problem of Tax Evasion, 39 Nat'l Tax J. 13, 14 (1986) (The term 'avoision' on
occasion has been used to refer to tax avoidance activity of questionable legality.).) For a good
general discussion of these issues by Nobel Prize winning economist (Gary Becker) and an
outstanding federal judge (Judge Posner of the Seventh Circuit), see their blog on Why So Little Tax
Evasion? (I caution readers, however, that the two authors have some of their technical details
wrong (e.g., Becker states a higher audit rate than the actual audit rate and Posner sets the civil fraud
penalty at 100% rather than 75%; those inaccuracies while perhaps disconcerting to a tax nerd do
not detract from the points they are making).
26
Id. Professor Lederman illustrates this in a simple example that I quote in full,
without the footnotes that explain some of the subtleties of the simple example (pp. 1464-5):
As a simplified example, assume that a taxpayer is facing a decision whether
or not to report $3,000 of income received in cash. Assume that the applicable tax
rate is 33 1/3% so that the tax at stake is $1,000. Also assume that if the taxpayer is
caught, the taxpayer will owe a penalty of $3,000 plus the tax that was legally due.
(Assume for simplicity that all amounts are adjusted to current dollars.) If there is
a 2% chance that a taxpayer will be audited and a 100% chance that, if audited, the
taxpayer will owe the $3,000 penalty, the expected penalty for noncompliance is
only $60, while the expected benefit of noncompliance is $980 (reflecting a 98%
chance of retaining the unpaid $1,000). In other words, the expected value of
cheating is $920, and rationally the taxpayer should cheat whenever the expected
value is positive.
This example assumes only dollar penalties (often referred to as civil penalties) for noncompliance.
The risk of criminal penalties will increase the risk to reward ratio but in a manner that is less easily
quantifiable under economic modeling concepts.
27
Compania de Tabacos v. Collector, 275 U.S. 87, 100 (1904) (Holmes dissenting).
-8-
inhibiting their willingness to play.28 But other taxpayers will not. Because of insufficient
enforcement resources and societys unwillingness to accept a more intrusive IRS, the risk / reward
analysis often favors the taxpayer willing to play.
Anecdotally, we all know that the IRS just doesnt audit many taxpayers. Sure, we hear of
audits from hell, but how many of us really know many who have actually been audited beyond a
level of computer matching where the audit is all by correspondence targeted to the unmatched
item? And, the statistics the IRS provides confirms that the risk / reward ratio is low. We wont try
here to analyze the statistics and do approach them with caution, reminded of Benjamin Disrealis
musing that there are lies, damned lies, and statistics.29 Still, the IRS 2011 IRS Data Book30 paints
a picture of low audit coverage less than 1% overall.31
A taxpayer falling in the category of having unidentified tax dollars (because he did not
report the liability and it is not identified through the examination function) is said to have played
the audit lottery and won. I discuss below the system of penalties that operate as an incentive to not
play the audit lottery to correctly report tax liability. Practitioners and the IRS know, however that
the penalty only imperfectly performs its functions, leaving a lot of taxpayers with the incentive to
play the audit lottery at a level consistent with their tolerance for risk.32
28
Other thoughtful observers see more rationality in at least some taxpayers choice not
to be too aggressive on their taxes. In their blog on Why So Little Tax Evasion, Judge Posner
concludes that: more tax compliance can be attributed to rational fear of punishment than he
[Becker] suggests and less to taxpayers feeling a moral duty to pay taxes. In support of his
conclusion, Judge Posner notes, in addition to the risk of criminal prosecution, the high civil
penalties (which he misstates as 100% rather than 75%, the penal for civil fraud), heavy costs of
legal and accounting expertise to defend against a criminal tax charge, and information costs
involved in merely acquiring the expertise to do any sophisticated type of tax evasion.
29
This quote is sometimes attributed to Mark Twain.
30
IRS 2011 Data Book, see Table 9a at p. 22.
31
As with all statistics, one needs to be careful with this one. The less than 1% audit
rate relates to all returns, and might be useful if the IRS performed audits randomly. The IRS does
not audit randomly in most cases; rather, through various selection techniques, the IRS selects for
audit returns that it believes offers more than random opportunity for adjustment and then, even after
selecting a return, focuses only on those items, again based on selection techniques, that it believes
offer more than random opportunity for adjustment. Surely, these techniques miss a lot, but they
also produce more than random results in the audit.
32
One could make strong arguments that, considering all taxpayers, the penalty system
is not a sufficient incentive because it still leaves the risk / reward ratio tilted in the favor of players
of the audit lottery. See generally Leandra Lederman, The Interplay Between Norms and
Enforcement in Tax Compliance, 64 Ohio St. L. J. 1453 (2003).
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C.
Willfulness, Mens Rea and the Guilty Mind.
Crimes in Anglo-American jurisprudence have generally required both an act deemed

antisocial -- often called the actus reus and a culpable mental state often called mens rea.33 I
focus here on the culpable mental state. Mens rea is a broad concept that is far too complex for
development in this course,34 but students of federal tax crimes must be aware of the general concept
and its specific implementation for tax and related crimes.35
33
Mens rea the guilty mind is shorthand from the following Latin quote: actus non
facit reum nisi mens sit rea, which means that the act does not make a person guilty unless the
mind is also guilty. See Wikipedia entry on Mens Rea (last viewed 7/12/12). The Supreme Court
described the dual requirements of act and mind colorfully as an evil-meaning mind [and] an
evil-doing hand. Morissette v. United States, 342 U.S. 246, 251 (1952). The evil-doing hand is
often referred to as the actus reus the guilty act which, when coupled with the guilty mind, makes
a crime in traditional Anglo-American jurisprudence. See also Staples v. United States, 511 U.S.
600, 605 (1994) (mens rea is firmly embedded in the common law and our notions of criminal
culpability, thus influencing interpretation of the criminal statute, except where Congress has
expressly prescribed that mens rea is not required; in Staples, the court interpreted into the statute
a knowingly requirement despite the statute not having that requirement; of course this begs the
question of what precisely is mens rea, to which we now turn).
34
One author has claimed, without much of an overstatement, that there is no term
fraught with greater ambiguity than that venerable Latin phrase that haunts Anglo-American
criminal law: mens rea. George P. Fletcher, Rethinking Criminal Law 398 (1978). The general
mens rea concept is embodied in various statutory formulations such as willful in a tax context that
I discuss in the text. Another author has noted, however, that federal statutes provide over 100
formulations of the mens rea concept, of which willful is only one. Julie O'Sullivan, The Changing
Face of White-Collar Crime: The Federal Criminal Code is a Disgrace: Obstruction Statutes as
a Case Study, 96 J. Crim. L. & Criminology 643, 656 (2006), citing William S. Laufer, Culpability
and Sentencing of Corporations, 71 Neb. L. Rev. 1049, 1065 (1994). And, yet another author
concludes that, even when the particular statutory text of a crime has no express text invoking the
concept of mens rea (in its various formulations), courts may impose an element of moral
blameworthiness via the mens rea concept because of its foundational context in Anglo-American
jurisprudence. Stephen F. Smith, Proportional Mens Rea, 46 Am. Crim. L. Rev. 127 (2009) (When
a literal interpretation of a federal criminal statute could encompass innocent behavior, courts stand
ready to impose heightened mens rea requirements designed to exempt all such behavior from
punishment. The goal of current federal mens rea doctrine, in other words, is nothing short of
protecting moral innocence against the stigma and penalties of criminal punishment.).
35
I recommend Professor OSullivans treatment of the broader mens rea concept.
OSullivan, supra, Ch. 2 pp. 67 - 120.
- 10 -
The principal mens rea element of federal tax and related crimes appears in the general
requirement that the defendant act willfully.36 In a leading tax case, United States v. Bishop, 412
U.S. 346, 361 (1973), the Supreme Court said:
The Court's consistent interpretation of the word willfully to require an element of
mens rea implements the pervasive intent of Congress to construct penalties that
separate the purposeful tax violator from the well-meaning, but easily confused, mass
of taxpayers. Until Congress speaks otherwise, we therefore shall continue to
require, in both tax felonies and tax misdemeanors that must be done willfully, the
bad purpose or evil motive described in Murdock, supra.
Consider the following from the Supreme Courts decision in Bryan v. United States, 524
U.S. 184 (1998), involving a federal firearm licensing statute which made it a crime to willfully
deal in firearms without a federal license:
The word willfully is sometimes said to be a word of many meanings
whose construction is often dependent on the context in which it appears. See, e.g.,
Spies v. United States, 317 U.S. 492, 497 (1943). Most obviously it differentiates
between deliberate and unwitting conduct, but in the criminal law it also typically
refers to a culpable state of mind. As we explained in United States v. Murdock, 290
U.S. 389 (1933), a variety of phrases have been used to describe that concept.37 As
a general matter, when used in the criminal context, a willful act is one undertaken
with a bad purpose. In other words, in order to establish a willful violation of
a statute, the Government must prove that the defendant acted with knowledge that
his conduct was unlawful. Ratzlaf v. United States, 510 U.S. 135, 137 (1994).
In response to Bryans argument that willfully should be interpreted consistently with the
interpretation of the term used in the federal tax laws, the Court said (emphasis supplied):
In certain cases involving willful violations of the tax laws, we have concluded
that the jury must find that the defendant was aware of the specific provision
of the tax code that he was charged with violating. See, e.g., Cheek v. United
States, 498 U.S. 192 (1991).38 Similarly, in order to satisfy a willful violation in
36
E.g., 7201 describing the crime of tax evasion requires that the actor willfully
attempt to evade.
37
[Fn12 from Bryan] The word often denotes an act which is intentional, or knowing,
or voluntary, as distinguished from accidental. But when used in a criminal statute it generally
means an act done with a bad purpose; without justifiable excuse; stubbornly, obstinately,
perversely. The word is also employed to characterize a thing done without ground for believing
it is lawful, or conduct marked by careless disregard whether or not one has the right so to act.
38
[Fn17 from Bryan] Even in tax cases, we have not always required this heightened
mens rea. In United States v. Pomponio, 429 U.S. 10 (1976) (per curiam), for example, the jury was
instructed that a willful act is one done with [the] bad purpose either to disobey or to disregard the
- 11 -
Ratzlaf, we concluded that the jury had to find that the defendant knew that his
structuring of cash transactions to avoid a reporting requirement was unlawful. See
510 U.S. at 138, 149. Those cases, however, are readily distinguishable. Both the
tax cases39 and Ratzlaf40 involved highly technical statutes that presented the danger
of ensnaring individuals engaged in apparently innocent conduct.41 As a result, we
held that these statutes carve out an exception to the traditional rule that ignorance
of the law is no excuse42 and require that the defendant have knowledge of the law.43
law. Id., at 11. We approved of this instruction, concluding that the trial judge . . . adequately
instructed the jury on willfulness. Id., at 13.
39
[Fn18 from Bryan] As we stated in Cheek v. United States, 498 U.S. 192, 199-200
(1991),
The proliferation of statutes and regulations has sometimes made it difficult for
the average citizen to know and comprehend the extent of the duties and obligations
imposed by the tax laws. Congress has accordingly softened the impact of the
common-law presumption by making specific intent to violate the law an element of
certain federal criminal tax offenses. Thus, the Court almost 60 years ago interpreted
the statutory term 'willfully' as used in the federal criminal tax statutes as carving out
an exception to the traditional rule [that every person is presumed to know the law].
This special treatment of criminal tax offenses is largely due to the complexity of the
tax laws.
40
[Fn19 from Bryan] See Bates v. United States, 522 U.S. 23, 31, n. 6 (1997) (slip op.,
at 7, n. 6) (noting that Ratzlaf's holding was based on the particular statutory context of currency
structuring); Ratzlaf, 510 U.S. at 149 (Court's holding based on particular context of currency
structuring statute).
41
[Fn20 from Bryan] Id., at 144-145 (Currency structuring is not inevitably nefarious
. . . . Nor is a person who structures a currency transaction invariably motivated by a desire to keep
the Government in the dark; Government's construction of the statute would criminalize apparently
innocent activity); Cheek, 498 U.S. at 205 (In our complex tax system, uncertainty often arises
even among taxpayers who earnestly wish to follow the law, and it is not the purpose of the law
to penalize frank difference of opinion or innocent errors made despite the exercise of reasonable
care. United States v. Bishop, 412 U.S. 346, 360-361, 36 L. Ed. 2d 941, 93 S. Ct. 2008 (1973)
(quoting Spies v. United States, 317 U.S. 492, 496, 87 L. Ed. 418, 63 S. Ct. 364 (1943))); Murdock,
290 U.S. at 396 (Congress did not intend that a person, by reason of a bona fide misunderstanding
as to his liability for the tax, as to his duty to make a return, or as to the adequacy of the records he
maintained, should become a criminal by his mere failure to measure up to the prescribed standard
of conduct).
42
[Fn21 from Bryan] Cheek, 498 U.S. at 200; see also Ratzlaf, 510 U.S. at 149 (noting
the venerable principle that ignorance of the law generally is no defense to a criminal charge, but
concluding that Congress intended otherwise in the particular context of the currency structuring
statute).
43
[Fn22 from Bryan] Even before Ratzlaf was decided, then Chief Judge Breyer
explained why there was a need for specificity under those statutes that is inapplicable when there
is no danger of conviction of a defendant with an innocent state of mind. He wrote:
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The danger of convicting individuals engaged in apparently innocent activity that

motivated our decisions in the tax cases and Ratzlaf is not present here because the
jury found that this petitioner knew that his conduct was unlawful.44
As the Court noted, willfulness has variant meanings, but in part pertinent here the Courts
seem to discuss two categories that highlight its meaning in a tax sense.45 The first category of
willfulness crimes requires the
defendant to have known that his actions were in some way unlawful. [H]e need not
have known of the specific statute, but rather he must have acted with the knowledge
that he was doing a bad act under the general rules of law. Under this intermediate
level of criminal common law willfulness, the Government must prove that the
defendant acted with knowledge that his conduct was unlawful.46
I believe that criminal prosecutions for currency law violations, of the sort at
issue here, very much resemble criminal prosecutions for tax law violations.
Compare 26 U.S.C. 6050I, 7203 with 31 U.S.C. 5322, 5324. Both sets of laws
are technical; and both sets of laws sometimes criminalize conduct that would not
strike an ordinary citizen as immoral or likely unlawful. Thus, both sets of laws may
lead to the unfair result of criminally prosecuting individuals who subjectively and
honestly believe they have not acted criminally. Cheek v. United States, 498 U.S.
192 (1991), sets forth a legal standard that, by requiring proof that the defendant was
subjectively aware of the duty at issue, would avoid such unfair results. United
States v. Aversa, 984 F.2d 493, 502 (CA1 1993) (concurring opinion).
He therefore concluded that the same standards should apply in both the tax cases and in cases
such as Ratzlaf. 984 F.2d at 503.
44
[Fn23 from Bryan] Moreover, requiring only knowledge that the conduct is unlawful
is fully consistent with the purpose of FOPA, as FOPA was enacted to protect law-abiding citizens
who might inadvertently violate the law.
45
I draw this discussion principally from two nontax cases that have pretty good
summaries. The most recent is United States v. Mousavi, 604 F.3d 1084 (9th Cir. 2010), which
actually involved a tax crime, but the discussion of willfulness was in the context of a nontax crime
with a similar willfulness requirement. The second case is United States v. Kay, 513 F.3d 432, 447448 (5th Cir. 2007), en banc and panel rehearing denied with clarification 513 F.3d 461 (5th Cir.
2008). Kay involved an appeal from a conviction under the Foreign Corrupt Practices Act, FCPA,
15 U.S.C. 78dd-2, 78ff, which contain a willfulness requirement for improper payments made
to foreign officials. I should note that the opinion in Kay breaks the willfulness variants into three
categories, but the first is a nonstatutory willfulness meaning that, in order to be guilty of a crime,
the defendant must have intentionally done the act that the law defines as a crime. In this category,
the standard rule that ignorance of the law is no excuse and the defendant can be convicted even
though he had no general or specific knowledge that his conduct was unlawful.
46
United States v. Kay, 513 F.3d 432, 447-448 (5th Cir. 2007).
- 13 -
The second category

requires that the defendant knew the terms of the statute and that he was violating the
statute. The courts have reserved this category to limited types of statutory violations
involving complex statutes namely those governing federal tax law and antistructuring transactions.
Under this rare exception (which covers our third and strictest level of
criminal willfulness), a defendant must know the specific law that he is violating in
order to act willfully. The highly technical exceptional statutes to which the Court
in Bryan refers are federal tax laws, for which the Court has explicitly carv[ed] out
an exception to the traditional rule that ignorance of the law is no excuse. . . .47
The Ninth Circuit recently stated the two criminal statutory categories slightly differently:
The Supreme Court's jurisprudence in this area has evolved over time, but now
appears to establish two standards, one higher than the other, for willfulness in the
criminal context. In the context of criminal statutes, the word "willful" generally
indicates a requirement of specific intent. As a general matter, when used in the
criminal context, a willful act is one undertaken with a bad purpose. Said
otherwise, in order to establish a willful violation of a statute, the Government
must prove that the defendant acted with knowledge that his conduct was unlawful.
But in a context involving highly technical statutes that present the danger of
ensnaring individuals engaged in apparently innocent conduct, the Supreme Court
has suggested that willfulness requires the government to prove that the defendant
acted with specific intent to violate a known legal duty.48
Now, on the second category specific intent to violate a known legal duty. You will recall
that, in Bryan, the Supreme Court said that that standard required in tax cases that the Government
prove the defendant was aware of the specific provision of the tax code that he was charged with
violating. Did the Supreme Court really mean that? The answer is no, at least according to the
Ninth Circuit in a recent case (an answer that must be the right one). In discussing the cases upon
which Bryan relied for the statement (Cheek and Ratzlaf), the Ninth Circuit said:
Neither of these cases, however, required the government to prove the defendant's
knowledge of a specific provision of law. In Cheek, the Supreme Court held that
willfulness, as used in the criminal provisions of the tax code, required the
government to prove that the defendant knew of the legal duty to file an income tax
return and to treat his wages as income. But the Court noted that the jury would be
free to consider any admissible evidence from any source showing that the
47
United States v. Kay, 448, 450.

United States v. Mousavi, 604 F.3d 1084, 1092 (9th Cir. 2010) (case citations omitted
and quotation marks omitted).
48
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defendant was aware of this duty. While Cheek listed awareness of the relevant
provisions of the Code or regulations as one source of such evidence, it did not
identify it as the exclusive source. Similarly, Ratzlaf held that the government could
not carry its burden to prove the "willfulness" requirement in a prosecution for illegal
structuring of financial transactions merely by proving that the defendant knew of
the bank's duty to report cash transactions of more than $ 10,000. Nevertheless, the
government did not have to prove that the defendant was aware of the provision of
the federal statute that made it illegal to structure his cash deposits to avoid
triggering the bank's reporting obligation. It was sufficient if a jury could reasonably
conclude that the defendant knew of his duty to refrain from structuring," a
conclusion which could be based on "reasonable inferences from the evidence of
defendant's conduct. Similarly, prior to Cheek and Ratzlaf, we indicated that
"willfulness" under a complex anti-exportation statute required proof of "a voluntary,
intentional violation of a known legal duty," but we considered this standard satisfied
where the government proved that the defendant [knew] that his conduct . . . is
violative of the law. These cases make clear that even in the context of highly
technical statutes that presented the danger of ensnaring individuals engaged in
apparently innocent conduct, the term willfulness requires the government to
prove that the defendant was aware of the legal duty at issue, but not that the
defendant was aware of a specific statutory or regulatory provision.49
The Seventh Circuit said it more pungently in responding to an argument that knowledge of
the Code section is required for willfulness:
Knowledge of the law's demands does not depend on knowing the citation any more than
ability to watch a program on TV depends on knowing the frequency on which the signal is
broadcast.50
We will re-visit the willfulness element in more detail below, but here you should just keep
in mind the general approaches. Please keep in mind that the foregoing is intended as an
introduction to the issues and not as a definitive test of how the term willfully as used in tax and
related crimes will be interpreted.51
49
50
United States v. Mousavi, at 1092 (case citations omitted).

United States v. Patridge, 507 F.3d 1092, 1094 (7th Cir. 2007), cert. den. 552 U.S.
1228 (2008).
51
Readers interested in the subject of the use of willfully in defining federal crimes
will likely appreciate Judge Learned Hands statement of exasperation with the term:
It's a very dreadful word . . . . It's an awful word! It is one of the most troublesome
words in a statute that I know. If I were to have the index purged, "willful" would
lead all the rest in spite of its being at the end of the alphabet.
See Model Penal Code 2.02 n. 47 (Official Draft & Revised Comments 1985).
- 15 -
D.
Overview of the Procedural Aspects of the System.
I will deal in some detail later with how criminal cases are processed from initial
investigation through sentencing. At this point, however, I want to give you a brief overview of the
system and the players. This is a highly simplified overview, so please stay flexible as we go
through the materials.
1.
IRS Phase.
a.
General.
The IRS is the chief investigator of tax crimes.52 The IRS branch that investigates tax crimes
is Criminal Investigation (CI), sometimes referred to as CID, an acronym for its prior name
(Criminal Investigation Division). CI agents are referred to as Special Agents. Special Agents
are law enforcement officers, with many of the powers accorded law enforcement officers generally,
such as making arrests and carrying firearms.53 CI conducts investigations internally within the IRS
(that is, without any other law enforcement agencys involvement); these investigations are called
administrative investigations. (By contrast, CI agents may be assigned to assist a federal grand
jury conducting a criminal tax investigation, but such investigations are grand jury investigations
and not CI administrative investigations.)
52
The IRS is the only agency authorized to conduct criminal tax violations. See
Webster Report; and TIGTA 2005 CI Report, p. 1 (The CI function is the only law enforcement
organization with the authority to investigate criminal tax violations.) DOJ prosecutes tax crimes,
of course, and assists the grand jury when the grand jury investigates tax crimes. I should note that
DOJ Tax claims it has authority to investigate tax crimes independent of the IRS and independent
of a grand jury. I am skeptical. I have no clear authority other than these statements upon which
to base my skepticism, but something seems discordant with that authority. How exactly would the
DOJ Tax have access to IRS tax return information in order to conduct an effective criminal tax
investigation without a referral from the IRS under 6103(h)(2)? And, without a referral, 7122(a)
DOJ Tax would have no authority to compromise the criminal case and the IRS would have
exclusive authority to compromise the criminal case. There are other threads that make me want to
question DOJ Taxs claims of authority, but I defer that discussion to another forum. I will say that
I asked DOJ Tax by FOIA request to state its authority and all it came up with was not on point.
53
For example, 7608(a) specifically grants authority to agents enforcing the criminal,
forfeiture or seizure provisions laws related to liquor, tobacco and firearms taxes and reporting to
carry firearms, execute and serve search warrants and arrest warrants, and to arrest person in certain
cases. Section 7608(b) specifically grants authority to agents enforcing other criminal tax provisions
to execute and serve search and arrest warrants and to make arrests. Although 7806(b) does not
specifically grant authority for Special Agents to carry firearms (as 7608(a) does in the case of
liquor, tobacco and firearms taxes), the Treasury Department (including the IRS) takes the position
that the authority of Special Agents to carry firearms in enforcing the general criminal tax laws is
implied. IRM 9.1.2.4.1 Authority To Carry Firearms (11-10-2004). Hence, Special Agents will
often carry firearms in carrying out their duties.
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In an administrative investigation, Special Agents may use the IRS administrative summons
to compel testimony and the production of documents.54 They may use other investigative
techniques, including clandestine observations, informants, stings, etc. Special Agents may also
seek search warrants, with the assistance of the local United States Attorney, where they must show
need and probable cause to believe that a crime has been committed.
CI's significant resources include IRS counsel who are assigned to CI, like in-house
counsel. The Special Agent has this legal resource readily available in all phases of the
investigation. Previously, IRS counsel were in a separate office under the supervision of IRS Chief
Counsel which serviced all of the IRS, including CI. By analogy, this was sort of like outside
counsel. Being part of a separate office, counsel was then usually less involved at key stages of
the investigation. Under the new structure, counsel is actively involved on an as needed basis and
thus assist Special Agents in avoiding some of the procedural and strategic problems previously
encountered because of lack of easy access to counsel.
CI investigations are typically thorough and time-consuming. I have had CI investigations
go on over 3 years with significant observable activity during much of the entire period. The point
I make here is that the IRS picks its cases, only mounts full investigations against a relative few (a
topic I will discuss in further detail later), and investigates hard and as long as it takes.
Of course the IRS cannot investigate forever. The key limitation on the chronological time
IRS CI can spend investigating is the criminal statute of limitations. The statute for most tax crimes
is 6 years, and for most Title 18 crimes (other than conspiracy) that travel with tax crimes is 5 years.
As I will note, conspiracy to commit tax crimes piggy-backs on the 6 year statute for tax crimes.
CI concludes an investigation by either (1) declining to pursue the matter further (sometimes
referred to as a declination) or (2) by forwarding the matter to the DOJ Tax Division (DOJ Tax)
for either criminal prosecution or for further investigation by a grand jury. If the IRS declines the
case, it will be referred back to the IRS civil or collection agents for further processing as
appropriate.55 Forwarding to DOJ Tax is called a referral. The balance of this overview will deal
with the process when the IRS refers the case to DOJ Tax.
The case will be referred to the DOJ Tax. The referral results in the IRS losing its exclusive
authority to compromise the criminal tax case and conferring on DOJ Tax the exclusive authority
to compromise the criminal tax case.56 A key component of the referral package will be the
Prosecution Recommendation Report (a report usually in the format of a Special Agent's Report
(often acronymed to SAR)57). In the SAR, the Special Agent develops all known considerations
54
7608(b)(2)(A). I discuss the administrative summons later in the book.

A Discontinue Investigation Report is required. IRM 9.5.8.8 (01-25-2006).
56
7122(a). And, by inference, when and if DOJ Tax refers the matter back to the IRS,
the IRS will then have the exclusive authority with respect to the criminal case.
57
IRM 9.5.8 Investigative Reports and 9.5.12 Processing Completed Criminal
Investigation Reports. A shorter form Summary of Investigation (SOI) is sometimes used,
55
- 17 -
relevant to prosecution and sentencing. The SAR is usually extremely thorough, reflecting the
careful development of the case during the IRS phase of the criminal process. IRS counsel will
review the SAR critically and encourage revisions where appropriate.
b.
Priorities and Allocation of Resources.

(1)
General.
In this role as the initiator of criminal tax investigations, CI serves a critical role. How it sets
its priorities and allocates its resources is critical. In the early to mid-90's, CI seemed to have had
mission drift where, according to some observers, it set priorities and allocated resources in a
manner not designed to best support the overall tax compliance needs of the system. Since that time
there have been two significant studies of CIs mission.
(2)
The Webster Commission Report.
In April 1999, the Criminal Investigation Review Task Force headed by former FBI Director
William Webster issued a report on the state of the IRS's criminal enforcement division (the
Webster Report).58 The report made recommendations for improving CI. The IRS has now
implemented or is in the process of implementing many of the recommendations and otherwise
refocusing its mission.
The Webster Report recommended that the IRS's CI refocus its efforts on its central
mission to act as the Internal Revenue Service's criminal investigative component in support of
the administration of the federal internal revenue laws. A significant portion of CI's investigative
resources had been focused on other national priorities -- such as drugs and organized crime -- and
away from its role in reinforcing the tax system. The Webster Report recommended that much of
those diverted resources be shifted back to general tax enforcement. CI can continue to be involved
in these other areas that can effectively use its financial skills, but the principal focus must be on tax
administration.
The Webster Commission Report makes a number of other recommendations. Where
appropriate, I address those recommendations in the materials below.
c.
TIGTA Reports on CI.
The Treasury Inspector General for Tax Administration (TIGTA) periodically investigates
various IRS functions, including CI. I report here on the most recent TIGTA report on CI.
principally in non tax grand jury investigations where a more comprehensive narrative is not
required. IRM 9.5.8.7 Summary of Investigation (01-25-2006).
58
Webster Commission, Review of the Internal Revenue Service's Criminal
Investigation Division (April 1999) from William H. Webster and the Criminal Investigation
Division Review Task Force (often referred to as the Webster Report).
- 18 -
In July 2010. TIGTA issued an annual report titled Trends in the Criminal Investigation
Divisions Enforcement Activities Showed Improvements; However Some Goals Were Not
Attained, dated July 1, 2010 (Reference Number 2010-30-074). The book is a treasure trove of
statistics as to the IRSs criminal investigation activities. This and the successor reports are key
documents in understanding the role of IRS CI.
d.
Influence of Other National Priorities.
As waves of financial fraud hit the national radar screen, the need for IRS CI involvement
will inevitably be directed to support national nontax enforcement priorities, despite the
recommendations of the Webster Report. The most timely example, is CIs involvement in
investigating and prosecuting mortgage lending fraud.59
Obviously, in such investigations implicating very high national priorities in nontax areas,
IRS CI financial experience is invaluable. But, IRS CIs active involvement does skew the IRS
enforcement resources away from the recommendations of the Warren Report. Sure, the IRS tries
to relate the devotion of resources back to the tax system by touting that there is a tax objective in
these efforts, but the question asked by the Warren Report is whether, considering the tax system
only, it is better to devote CIs limited resources to evasion with respect to legal income as opposed
to illegal income. That question remains the same, even as national priorities cause the answer to
shift.
2.
DOJ Tax Approval Phase.
DOJ Tax authorizes all criminal tax prosecutions and sets national prosecution standards and
priorities that further overall compliance with the federal tax system.60 In addition to its criminal
tax role, DOJ Tax has principal authority for virtually all tax litigation except in the United States
Tax Court. DOJ Tax handles all tax trials in the District Courts (including the Bankruptcy Courts)
and in the Court of Federal Claims. DOJ Tax handles all appeals (including appeals from the Tax
Court) and all tax cases in the Supreme Court. Thus, DOJ Tax is well situated to coordinate national
priorities in authorizing criminal tax prosecutions.
59
See IRS CI web page Titled Mortgage and Real Estate Fraud.
CTM 1.04[a] and 1.02[1] (2008 ed.) (citing Department of Justice Regulations on the
Tax Division, Sections 0.70 and 0.71 (28 C.F.R.), which provides, inter alia, delegation to handle
Criminal proceedings arising under the internal revenue laws, except in certain limited cases.)
The exceptions to DOJ Taxs criminal tax jurisdiction generally are not important to the subjects
covered in this book. Certain Tax Division Directives re-delegate this authority. See e.g., (Tax Div.
Dir. No. 87-61, quoted in CTM 3.00 (2008 ed.), delegating to certain persons outside the Tax
Division the authority to authorize tax prosecutions under 7203 and 7206 with respect to
Returns (IRS Form 8300) Relating to Cash Received in a Trade or Business as prescribed in 26
U.S.C. Section 6050I; and Tax Div. Dir. No. 96, quoted in CTM 3.00 (2008 ed.), delegating
authority regarding some 18 USC 286 and 287 false claims charges.
60
- 19 -
DOJ Tax is headed by the Assistant Attorney General (AAG). The AAG has a deputy, the
Deputy Assistant Attorney General (DAAG), with principal responsibility for criminal tax matters.
Criminal tax matters are handled by one of DOJ Taxs sections the Criminal Enforcement Section
(CES). CESs attorneys are based in Washington. CES generally divides its criminal jurisdiction
geographically e.g., the general southern area of the U.S. is handled by a section call Southern,
often referred to as CES - Southern or just CES-S.61 Attorneys in these sections evaluate IRS
recommendations with respect to criminal tax matters for (i) criminal prosecution of persons
investigated by the IRS or (ii) grand jury investigations of persons where the IRS is unable to
complete the investigation or the investigation is more efficiently handled by a grand jury.62 CES
also has a separate section titled Criminal Appeals & Tax Enforcement Policy Section (CATEPS),
which handles appeals from criminal trials (including coordinating with U.S. Attorneys offices
where they handle the appeals) and related proceedings and other policy matters.63 Although CESs
attorneys are generally based in Washington, they may be assigned to longer term details on task
forces located elsewhere and may shuttle out from Washington to local districts as needed.
Given the limited resources through the criminal tax enforcement system, CES must
coordinate and prioritize. CES does that by prosecuting relatively few cases each year (in recent
years from 1100 to 1800 per year),64 but focusing on the strongest cases where conviction is virtually
assured and by picking targets with a sufficiently high profile (for whatever reason) that the
conviction might be publicized and encourage compliance by persons who become aware of the
convictions.
Upon receipt of a referral from CI (via the CRL), CES reviews the recommendation and
underlying files to determine whether the case is within its prosecution enforcement priorities. If
the referral is for further investigation by a grand jury, DOJ Tax makes the decision based solely on
the quality of the recommendation and DOJ Taxs national enforcement priorities, taking into
consideration the priorities and resources of the local USAO. If the referral is for criminal
61
CTM 1.04[b] (2008 ed.). The DOJ Tax CES organization chart is at CTM 1.13 (2008
ed.).
62
In either event, the IRS recommendation is called a Justice Department referral or

some variation of that concept. As I will note later in the text, the referral has certain consequences.
First, as a practical matter, upon the referral the IRSs ability to further investigation via the IRS
summons is prohibited ( 7602(d)(2)(A). Second, and related, further criminal investigation until
and unless DOJ Tax returns the matter to the IRS proceeds if at all via a grand jury investigation
conducted by prosecutors of the Department of Justice (usually local Assistant United States
Attorneys). In this regard, it is important to note that DOJ Tax or any agency of DOJ (including the
local U.S. Attorneys or the FBI) has no authority to investigate independent of a grand jury
investigation. Tax investigations are conducted by the IRS or by a grand jury; no other Government
agency may investigate tax crimes not even DOJ Tax.
63
CTM 1.04[b] (2008 ed.).
64
DOJ Tax Assistant Attorney Generals Statement to the Senate Finance Committee
titled Filing Your Taxes: an Ounce of Prevention Is Worth a Pound of Cure (4/12/07) and
reproduced at 2007 TNT 72-36.
- 20 -
prosecution without further grand jury investigation, CES will generally afford the taxpayers
attorney an opportunity, if requested, for a conference in which the attorney may present arguments
and evidence that, in the attorneys judgment, CES should consider in making its decision.65 CES
can decline to accept the IRSs recommendation and return the matter to the IRS either for further
investigation or with instructions to close out the criminal investigation. If, however, CES approves
further processing, it will forward the matter to the United States Attorneys Office (USAO) for
the district where venue for criminal prosecution lies.
3.
Grand Jury and Prosecution Phase.

a.
The Prosecutor.
The USAO will assign the case to an Assistant United States Attorney (AUSA) who will
present the case to the grand jury and conduct such further investigation and prosecution as
necessary.66 In larger cases, more than one AUSA may be assigned, and a DOJ Tax CES attorney
may be designated Special AUSA (SAUSA) to assist. If for any reason the U.S. Attorneys office
(USAO) is not interested in pursuing the matter or is too busy to do so efficiently and timely, the
USAO may request that DOJ Tax CES attorneys conduct the prosecution as SAUSA for the
district.67 Consider the following from the perspective of the USAO:68
The USAO can also request litigation assistance from the Tax Division. This
assistance may be requested in a variety of forms. Some USAOs refer most, or all,
of their tax cases to the Tax Division, which conserves the resources of the USAO
for other priority cases in the district. Other USAOs request that a Tax Division
attorney be assigned to work with an AUSA and to provide a second chair attorney
with technical experience and expertise in tax cases. Still other USAOs mix these
methods by farming some cases in their entirety out to the Tax Division, and by
using the Tax Division to assist AUSAs at other trials and investigations.
To an AUSA the benefit from assigning a tax case in its entirety to the Tax
Division is obvious: assign the Tax Division attorney the case, show him or her the
65
CTM 2.00 (2008 ed.), citing USAM 6-4.214. I discuss these conferences in more
detail below.
66
This course assumes some background in the fundamentals of the jury process.
However, for a good general background on the history and development of the American jury
process, the ABAs Dialog on the American Jury: We the People in Action, Part I History of Trial
by Jury. Also, see Rule 6(e), FRCrP, which prescribes some of the roles of the attorney for the
government assigned to assist the grand jury.
67
See USAM 6-4.245. At the May 2008 ABA Tax Section May Meeting, Nathan
Hochman, AAG Tax, advised that approximately 20% to 25% of tax prosecutions are handled by
DOJ Tax attorneys.
68
John W. Vandreuil, An AUSAs Perspective on Working with the Tax Division, 46
USA Bulletin (No. 3) 11 (April 1998).
- 21 -
file, introduce him or her to the court, and go back to your office. There can also be
benefits, however, from a joint trial.
First, as with the grand jury investigation, the Tax Division attorney brings
technical expertise from criminal tax trials. Second, since the Tax Division is likely
to have addressed many of the standard motions and pleadings in tax cases, the Tax
Division attorney can handle pretrial motion work and document preparation. Third,
the Tax Division attorney can bring fresh and different perspectives to the trial.
Since the Tax Division litigates tax cases all over the country, its attorneys can bring
helpful suggestions for presenting and framing tax issues, presenting tax case
documents as exhibits, and handling certain types of tax case witnesses. Clearly, on
occasion I have told the Tax Division attorney, Thats all well and good, but it
wont work here with our judge. On the other hand, it is important to consider the
fresh ideas brought from the Tax Divisions experience in other jurisdictions. As
with the joint grand jury investigation, to guarantee success in a joint trial, it is most
important to delineate the roles and tasks clearly at the start and to take time to
develop a sound working relationship between the attorneys.
In the Southern District of Texas, we are blessed/cursed with AUSAs who have substantial
tax prosecution experience and a U.S. Attorney that believes that tax cases are consistent with his
local criminal enforcement priorities. Accordingly, an AUSA will usually handle tax prosecutions
from the grand jury through the sentencing.
b.
The Grand Jury Investigation.
If the CI investigation was thorough, there may be no need for further investigation. In that
case, the prosecutor will simply present the evidence to the grand jury without further investigation
and the indictment will then (usually) be forthcoming upon the prosecutors request.
There may, however, be a need for further investigation. This occurs where CES or the
prosecutor feels the need for investigation, often to fill in gaps perceived in the IRSs SAR.69
Although the initial CI investigation is still the norm in tax crime prosecutions, increasingly
tax crimes are being investigated from the inception by grand juries. For example, grand juries may
investigate other federal crimes and uncover tax violations that should be prosecuted as an adjunct
to the other crimes that are investigated and prosecuted. This often occurs in investigating money
laundering and organized crimes where, from a criminal enforcement priority standpoint, the other
crimes are the real focus but the tax crimes may substantially further the overall investigation. Al
Capone was targeted for a host of heinous crimes but was ultimately nailed for a tax crime.
Moreover, increasingly, criminal tax investigations are being instituted as grand jury investigations
before a CI administrative investigation is started or completed because, as I discuss in this course,
69
Actually, the IRSs principal investigative document in grand jury investigations is

the SOI unless, in the judgment of the agent or the SAC, the more comprehensive SAR is required.
IRM 9.5.8.2 Purpose and Importance of Investigative Reports (01-25-2006), paragraphs (2) and (3).
- 22 -
grand jury investigations can be far more efficient in major investigations than CI administrative
investigations. For example, grand jury investigations appear to be the vehicle of choice for
investigating potential tax crimes in the round of abusive tax shelters proliferating in the late 1990s
and early 2000s; these cases could have been investigated by CI, but the perception (and, I believe,
the reality) was that the grand jury was the superior investigation tool. In addition, because of its
expected size and scope, the abusive tax shelter investigations of major accounting firms (KPMG
and Ernst & Young) have been started as grand jury investigations. And, for the same reason, the
principal focus of criminal investigations related to offshore accounts appears to be through the
grand jury.
Where the grand jury is the preferred investigation tool, one or more CI Special Agents are
typically assigned to assist the grand jury. Then, if the prosecutor wants to indict for a tax crime,
the Special Agent(s) will prepare an SAR to be used to (1) obtain CIs recommendation and (2)
CESs approval. As noted above, the policy decision has been made that tax crimes generally
should support the overall revenue function of Government and therefore it is important that
indictment for tax crimes be consistent with or at least not in conflict with overall tax
enforcement goals, thus requiring the IRSs review and recommendation and CESs approval.
c.
Indictment and Trial.
If the grand jury indicts, the case is then prosecuted. Usually, because of the high standards
in seeking an indictment in the first place, the Government has a very good case and pre-trial plea
negotiations will result in a plea. If no plea is negotiated, the trial goes forward. The trial is simply
a criminal trial, with some nuances driven by the tax setting. But the standard criminal trappings
are there trial pursuant to the Federal Rules of Criminal Procedure, Federal Rules of Evidence and
various local rules and practices applying to general criminal proceedings.
4.
Sentencing Phase.
If the defendant is convicted, the defendant will be sentenced by the federal district judge.
I discuss the sentencing process below, but suffice it to say here that the most important
consideration in most cases will be the United States Sentencing Guidelines (Sentencing
Guidelines or just Guidelines) which provide a general framework for sentencing but have certain
features uniquely tailored to tax convictions. I alert my readers that I will usually refer to these
Guidelines as the Sentencing Guidelines or just the Guidelines and when referring to a particular
section of the Guidelines (particularly in footnotes) with refer to them as S.G. (despite the potential
confusion with the acronym for Solicitor General).
Morever, the Guidelines are just advisory as to sentencing. Because of major Supreme Court
cases starting in around 2005, the Guidelines are advisory rather than mandatory. Still, they must
be considered by the sentencing court as the starting point for sentencing; hence, the practitioner
must become expert at how they work and can be deployed to mitigate the sentence.
- 23 -
5.
Appeals.
The taxpayer may then appeal his conviction and/or sentence, provided that the taxpayer has
not waived his right to appeal. Most tax indictments result in plea agreements in which the taxpayer
generally has no right to appeal unless he has preserved some issue for appeal. The Government
usually will insist upon an express statement in the plea agreement that the right to appeal is waived.
IV.
Punishment and Fines.
The Code provisions defining the tax crimes set forth the maximum incarceration and fines
for the crimes. There are, however, two other key influences on the actual punishments.
First, and most importantly, except in the most egregious of cases, the maximum
incarceration and fines provided in the Code are not imposed. Rather, some lesser sentence is
imposed pursuant to the judges sentencing discretion, which in most cases is informed by the
advisory Sentencing Guidelines. The Code provisions do provide the maximum incarceration and
fine, but the Sentencing Guidelines are the principal factor in setting the actual incarceration and
fine. I discuss the Sentencing Guidelines below in Chapter 3.
Second, 18 U.S.C. 3571 (sometimes referred to as the Criminal Fine Enforcement Act of
1984 (P.L. 98-596) (CFEA)), increases the maximum permissible fines for both misdemeanors
and felonies. Thus, for example, the Code provision for tax evasion ( 7201) provides maximum
fines of $100,000 for individuals and $500,000 for corporations. Section 3571, however, provides
that the maximum permissible fine for a felony conviction is at least $250,000 for individuals and
$500,000 for corporations and may exceed even those amounts based on doubling the pecuniary gain
to the defendant or doubling the pecuniary loss to the victim. See 3571(b)(3) and (c)(3). These
maximums, however, are also subject to the caveat noted that actual sentencing is pursuant to the
Guidelines which result in sentences below the maximums in all except the most egregious of tax
cases.
V.
Relationship of Tax Crimes to White Collar Crimes.
Mainstream criminal tax practice should be viewed as a subset of white collar crime practice.
I think most of us have a general notion of the concept of white collar crime, but pinning down a
precise definition is elusive. See Julie R. OSullivan, Federal White Collar Crime: Cases and
Materials 4-7 (5th Ed. West 2012). Without getting into the esoterica, I follow Professor
OSullivans lead in accepting for present purposes the following definition from the Department
of Justice:
White-collar offenses shall constitute those classes of non-violent illegal activities which
principally involve traditional notions of deceit, deception, concealment, manipulation,
breach of trust, subterfuge or illegal circumvention.70
70
OSullivan, p. 6. See also Report of the Attorney General, U.S. Dept. of Justice,
National Priorities for the Investigation and Prosecution of White Collar Crime, p. 5 (1980), noting
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That is a very broad definition, but I think helpful for present purposes.
Tax crimes fit comfortably within this definition of white collar crimes. A personal anecdote
will illustrate the point. I represented a defendant in the massive criminal prosecution arising from
KPMGs promotion of tax shelters. There were originally 19 defendants in the prosecution billed
as the largest tax shelter prosecution in history. Almost all of the defendants attorneys were general
white collar crime lawyers who did not specialize in tax crimes. The prosecution was simply a white
collar crime prosecution in a tax setting. Most of the issues and concepts that arose in the trial were
not unique to tax; they required little in the way of tax esoterica. They did require extensive
knowledge of white collar crime practice. And, that case did generate a landmark white collar crime
decision affirming the dismissal of 13 of the 19 defendants because the prosecutors, applying now
discredited DOJ policies, had improperly pressured KPMG to dismiss partners who did not
cooperate in the grand jury investigation.71
As a result, many of the issues and concepts I discuss in this book in a tax setting are not
unique to the tax setting. Some are. The tax crimes defined in the Internal Revenue Code, of course,
are unique to the tax setting, but how they play out in a criminal context is mostly driven by general
concepts familiar in the white collar crime universe. For that reason, I can recommend no better
companion to this book than Professor OSullivans book cited above.
VI.
Methodology.
My methodology for introducing each of the various crimes is first to set forth the statute.
The statute defines the crime. We do not have common law crimes. I then summarize the key
elements of the crimes the matters that the Government must prove beyond a reasonable doubt in
order to obtain a conviction. I then provide a materials section wherein I discuss some aspects of
the crime and sometimes provide case or other materials designed to illustrate important principles.
After introducing the tax crimes and the related Title 18 crimes, I discuss the sentencing
which is so important to a defendant in any criminal case. I then discuss certain features (such as
the statutes of limitations for the various crimes) and important legal background to the processing
of criminal investigations and prosecutions (such as privileges and investigative and prosecution
techniques).
also the FBI working definition as follows (p. 6 n. 8):

Those illegal acts characterized by deceit, concealment, violation of trust, and not
dependent upon the application or threat of physical force or violence. They are
committed to obtain money, property, or services; or to avoid the payment or loss of
money, property or services to secure personal or business advantage.
The Attorney Generals Report is available here:
https://www.ncjrs.gov/pdffiles1/Digitization/70875NCJRS.pdf (Last viewed 7/12/12).
71
United States v. Stein, 541 F.3d 130 (2d Cir. 2008).
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Finally, I introduce you to the criminal tax process by taking you through the process on the
typical time-line, from investigation through conviction. This will be principally a contextual
review of the earlier materials, but will add some new materials to flesh out the context.
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CH. 2 - THE TAX CRIMES

I.
TAX CRIMES.
I discuss the tax crimes roughly in the order of their severity and importance. I do not deal
at all, for example, with tax crimes of relatively narrow focus and little impact in the system.
A.
Tax Evasion ( 7201).
Tax evasion is the capstone of the traditional tax crimes (the crimes reflecting solely tax
priorities).72 This is the worst a taxpayer can do in terms of punishment for offending the tax system.
As I will note, however, money laundering which is not a tax crime carries greater penalties.
1.
The Statute.
Sec. 7201. Attempt to evade or defeat tax

Any person who willfully attempts in any manner to evade or defeat any tax
imposed by this title or the payment thereof shall, in addition to other penalties
provided by law, be guilty of a felony and, upon conviction thereof, shall be fined
not more than $100,000 ($500,000 in the case of a corporation), or imprisoned not
more than 5 years, or both, together with the costs of prosecution.
Caveat: As I said in the Chapter 1, the sentences and fines stated in the statute are the maximum.
The actual sentence and fine are determined by sentencing factors discussed in Chapter 3. Except
in the most egregious of cases involving very large tax dollars, the actual sentence and fine will be
less than provided in the statute. I will not again repeat this caveat.
2.
The Elements.
The elements of tax evasion are described in everyday language in the following jury charge
(which as noted in the footnote is a modified version from a specific recent case rather than pattern
jury instruction):
The Essential Elements Of Attempt To Evade Or Defeat A Tax
To establish the offense of attempting to evade and defeat a tax, the
government is required to prove beyond a reasonable doubt the following three
elements:
72
The capstone characterization was originally given by the Supreme Court in Spies
v. United States, 317 U.S. 492, 497 (1943) and has since been a component of many discussions of
7201. E.g., Boulware v. United States, 552 U.S. 421, 424 (2008). This has entered the jargon of
the criminal tax practice and is commonly understood to refer to Spies without having to mention
Spies.
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First, a substantial income tax was due and owing from the defendant in
addition to that declared in his [her] income tax return;
Second, [after _____ [the beginning of the period of limitations],] the
defendant made an affirmative attempt, in any manner, to evade or defeat an income
tax, and
Third, the defendant willfully attempted to evade and defeat the tax.73
3.
Notes and Materials.

a.
Evasion Assessment v. Payment.
The statute describes two types of evasion. The first, and the more commonly charged, is
evasion of assessment. This is an attempt by the taxpayer to prevent the IRS from knowing that an
unpaid tax is due, thereby avoiding any attempts by the IRS to make him pay the tax. The most
common method of evasion of assessment is filing a false tax return underreporting the tax liability.
False statements made to IRS agents in order to prevent them from determining the tax liability may
also be acts of evasion of assessment. The jury instruction presented above is an evasion of
assessment instruction. The second type of evasion is evasion of payment. Evasion of payment
occurs where the IRS knows of and usually has assessed the tax liability,74 but the taxpayer takes
73
CTM Government Proposed Jury Inst. No. 26.7201-3 (2008 ed.) (footnote omitted
and nested brackets inserted). This CTM tax evasion instruction is better than tax evasion
instructions in some pattern jury instructions because it is so straightforward. For a more obtuse tax
evasion jury instructions, see the Fifth Circuit Pattern Jury Instruction 2.96 and compare that
instruction with the Fifth Circuits more straightforward statement of the elements, substantially the
same as the CTM, in United States v. Miller, 588 F.3d 897, 907 (5th Cir. 2009) (The elements of
a violation of 26 U.S.C. 7201 are: (1) existence of a tax deficiency; (2) an affirmative act
constituting an evasion or an attempted evasion of the tax; and (3) willfulness.). These discussions
of jury instructions track the elements of the crime of evasion as stated by the Supreme Court.
Boulware v. United States, 552 U.S. 421, 424, n 2 (2008) (citing Sansone v. United States, 380 U.S.
343, 351 (1965)). See also United States v. Maggert, 2011 U.S. App. LEXIS 10976 (11th Cir. 2011)
(addressing a similarly deficient pattern jury instruction in the Eleventh Circuit but sustaining the
instruction based thereon under the plain error standard).
74
The question has arisen whether an assessment is required for an evasion of payment
charge. The weight of authority currently is that an assessment is not required. See United States
v. Gustafson, 528 F.3d 587, 592-3 (8th Cir. 2008) and United States v. Ellett, 527 F.3d 38, 40-41 (2d
Cir. 2008) (citing cases); see also United States v. Farnsworth, 456 F.3d 394 (1st Cir. 2006) (where
the district court indicated, based on Third Circuit dicta that it would require proof of assessment
for the evasion of payment charge which prompted the Government to make a pre-trial appeal; the
First Circuit held that the appeal was premature and that mandamus could not apply, but appeared
(at least to this reader) to signal to the district court that it might want to reconsider its prior dicta
that evasion of payment requires assessment). In support of this proposition, some courts have cited
26 U.S.C. 6151(a) ([W]hen a return of tax is required under this title or regulations, the person
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affirmative steps to prevent the IRS from collecting the tax. A classic example of evasion of
payment is the movement of one's resources offshore beyond the IRSs means of collection.
Another example is omitting assets from the balance sheet submitted to the IRS with an offer in
compromise to settle an outstanding tax assessment based upon the allegation that the taxpayer is
unable to pay the amount assessed.75 More subtle forms of evasion of payment can occur if the
taxpayer deliberately gives away, spends or wastes all assets in order to avoid having any source
from which the IRS could collect the tax.
There is some semantical dispute as to whether 7201 describes two separate offenses or
simply describes one offense tax evasion that is committed by attempting to evade assessment
or attempting to evade payment. The weight of authority seems to treat it as two separate offenses;76
as one court has noted, however, the separateness of the two offenses is perhaps confusing because
an evasion of assessment per se is an evasion of payment so that every evasion of assessment has
an aspect of failure to pay.77 I see no need here to enter this fray, since it does not affect the outcome
of cases except at the margins.78 Without taking sides in this debate, I sometimes use the term tax
evasion to mean both or either evasion of assessment and evasion of payment.
required to make such return shall, without assessment or notice and demand from the Secretary .
. . pay such tax at the time and place fixed for filing the return . . . .). Still, in evasion of payment
cases, an assessment will usually have been made, even if that is not a required element.
75
These are merely simple and obvious examples. Sometimes the evasion represent
a combination of these methods (e.g., United Stated v. Miller, 520 F.3d 504 (5th Cir. 2008)
(movement of assets offshore and omitting them from an offer in compromise).
76
See Sansone v. United States, 380 U.S. 343, 354 (1965) (describing as separate
offenses). See also United States v. McLaughlin, 126 F.3d 130, 136 (2d Cir.2003), cert. denied 524
U.S. 951 (1998) (Section 7201 includes two distinct offenses: evading assessment and evading
payment. . . . These offenses require different elements of proof.) In McLaughlin, the indictment
charged the defendant with evasion of payment, but the case was tried as an evasion of assessment
case. The court held that this might be a variance (even though 7201 was at least arguably a single
crime) but was not reversible because the defendant had not been prejudiced. The defendant was
aware that the case was tried as an evasion of assessment case and actually addressed that issue at
trial.
77
In United States v. Root, 585 F.3d 145, 151 n. 3 (3d Cir. 2009).
78
The Third Circuit in Root (585 F.3d 145) does spend some time on the issue in the
context of the evil of duplicity. Duplicity is describing more than one crime in a single count.
United States v. Cephus, 684 F.3d 703, 706 (7th Cir. 2012) ("In ordinary English the word
[duplicitous] means intentionally deceptive. But it is used in the law to characterize an indictment
that charges two or more different offenses in a single count.) The danger is the risk that a jury
verdict of guilty may not be based on unanimity as to each distinct offense (see 1A Charles Alan
Wright et al., Federal Practice and Procedure 142 (3d ed. 1999)); additionally it may carry some
inherent unfairness to the defendant in notice as to the charge made and in sentencing. See United
States v. Haddy, 134 F.3d 542, 548 (3d Cir. 1998).
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What if the taxpayer was just using the tax money he or she should have paid to the
Government for float with every intention of reporting and/or paying the Government in the
future? In Edwards v. United States,79 the Ninth Circuit held that the defendant's intent to postpone
payment but not evade the tax was a defense to a 7201 charge. Tax evasion requires that the
taxpayer must intend permanent evasion or nonpayment of the tax. Edwards, a tax attorney, just
wanted float on the use of the money until later, intending to take only interim advantage of the
time lag in the government investigation of delinquent returns. But, recognizing the implications
of this as a full bore defense, the Ninth Circuit has limited the holding and other courts have simply
not embraced it.80
Finally, evasion of assessment and evasion of payment may have different units of
prosecution. Evasion of assessment fits neatly (albeit not exclusively) into a one year, one count
analytical framework. The actions involved in the evasion of assessment for a year most often relate
to the understatement and underassessment for the year, and it is the unified tax for the year that is
evaded.81 For example, a taxpayer willfully makes false entries in his records and claims erroneous
deductions for a tax year; that relates to the discrete year, even if he has other misconduct, even
similar misconduct, in other years. Each year is charged as a separate count. Evasion of assessment,
by contrast, often involves single acts [after the date(s) of assessment] which are intended to evade
the payment of several years of tax due, thus sometimes permitting a single count to relate to
multiple years.82 But, a tougher question is whether multiple evasion of assessment counts could
apply to only a single years tax liability simply because there were multiple acts having the purpose
to avoid that years tax.83
79
375 F.2d 862 (9th Cir. 1967).

United States v. Huebner, 48 F.3d 376, 380 (9th Cir. 1994); and United States v.
Jewell, 614 F.3d 911, 923 (8th Cir. 2010).
81
Evasion of assessment for multiple years may be charged in one count, but evasion
of assessment usually draw a separate count for each year. For a fuller discussion, see United States
v. Root, 585 F.3d 145, (3d Cir. 2009) (surveying the current state of the law).
82
CTM, 8.07[2] (2008 ed.).
83
United States v. Pollen, 968 F.3d 78 (3d Cir. 1992) raises some of these issues in a
decision that, in my judgment, lacks clarity of reasoning. The defendant was charged with three
evasion counts for five years of evaded taxes, but with each count based upon a separate act intended
to evade tax over the same years. The court reasoned that, in an evasion of payment case, the
defendant could have separate acts to evade payment of multiple years aggregate taxes and that, for
that reason, it could be charged by the act rather than by the year. (Id., p. 87) Apparently realizing
that that was not a self-evident proposition that might make sense in all cases, the court immediately
narrowed its holding to the specific facts before it and said in further limitation (Id.):
The unit of prosecution which we have recognized does not encompass the charging
of a number of separate acts of evasion of a single years taxes in distinct counts. We
do not, therefore, need to reach the much more difficult question of whether the
language of section 7201 would support the splintering of the offense of tax evasion
into a number of attempts greater than the number of calendar years for which taxes
were evaded.
80
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b.
Affirmative Attempt.
The taxpayer must affirmatively attempt to evade or defeat tax due and owing. The statute
says attempt. The courts have added the affirmative spin to the statute in recognition of the
seriousness of the crime and to distinguish tax evasion from other, lesser tax crimes.84 For example,
a taxpayer may intend to evade tax by failing to file his tax return. But a mere failure to do
something is not an affirmative attempt to evade tax.85 Hence, as I discuss with respect to Spies, the
failure to file alone (without some other affirmative conduct to attempt to evade) will not support
a tax evasion charge; it will support the lesser misdemeanor offense of failure to file.
How does a failure to file turn to tax evasion in the real world? This occurs, for example,
if the taxpayer files W-4's claiming an outrageous number of exemptions so that no income tax is
withheld and then filing no return.86 It can also occur if the taxpayer fails to file and then, upon
inquiry by the IRS as to why he did not file, the taxpayer advises that he had no income when he did
in fact have sufficient income to require that he file a return.87 The lie is the affirmative act.88 (As
discussed below, the lie can be a key element for the crime of tax evasion and can also be the key
element in other crimes such as false statements under 18 U.S.C. 1001.89)
--------------------------------Spies v. United States, 317 U.S. 492 (1943)
Introductory Note: In this case, the Court interprets 1936 Act Sections 145(a), currently found in
1986 Code 7203 (failure to file a return), and 145(b), currently found in 1986 Code 7201
(evasion). Section 7203 will be discussed in more detail below, but you should be able to pick up
the gravamen of the section from the Courts discussion.
MR. JUSTICE JACKSON delivered the opinion of the Court.
Petitioner has been convicted of attempting to defeat and evade income tax, in violation of
145 (b) of the Revenue Act of 1936.
Petitioner admitted at the opening of the trial that he had sufficient income during the year
in question to place him under a statutory duty to file a return and to pay a tax, and that he failed to
84
See Spies, below.

See United States v. Nolen, 472 F.3d 362, 379-381 (5th Cir. 2008), discussing prior
consistent precedent.
86
United States v. King, 126 F.3d 987 (7th Cir. 1997); United States v. Williams, 928
F.2d 145 (5th Cir. 1991), cert. denied, 502 U.S. 811 (1991); and United States v. Gross, 2010 U.S.
App. LEXIS 23286 (6th Cir. 2010).
87
United States v. Goodyear, 649 F.2d 226 (4th Cir. 1981).
88
See Beacon Brass, at p. 38, below.
89
Discussed below beginning on p. 213.
85
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do either. The evidence during nearly two weeks of trial was directed principally toward
establishing the exact amount of the tax and the manner of receiving and handling income and
accounting, which the Government contends shows an intent to evade or defeat the tax. Petitioner's
testimony related to his good character, his physical illness at the time the return became due, and
lack of willfulness in his defaults, chiefly because of a psychological disturbance, amounting to
something more than worry but something less than insanity.
Section 145(a) makes, among other things, willful failure to pay a tax or make a return by
one having petitioner's income at the time or times required by law a misdemeanor. Section 145(b)
makes a willful attempt in any manner to evade or defeat any tax such as this a felony. Petitioner
was not indicted for either misdemeanor. The indictment contained a single count setting forth the
felony charge of willfully attempting to defeat and evade the tax, and recited willful failure to file
a return and willful failure to pay the tax as the means to the felonious end.
The petitioner requested an instruction that You may not find the defendant guilty of a
willful attempt to defeat and evade the income tax, if you find only that he had willfully failed to
make a return of taxable income and has willfully failed to pay the tax on that income. This was
refused, and the Court charged that If you find that the defendant had a net income for 1936 upon
which some income tax was due, and I believe that is conceded, if you find that the defendant
willfully failed to file an income tax return for that year, if you find that the defendant willfully
failed to pay the tax due on his income for that year, you may, if you find that the facts and
circumstances warrant it find that the defendant willfully attempted to evade or defeat the tax. The
Court refused a request to instruct that an affirmative act was necessary to constitute a willful
attempt, and charged that Attempt means to try to do or accomplish. In order to find an attempt it
is not necessary to find affirmative steps to accomplish the prohibited purpose. An attempt may be
found on the basis of inactivity or on refraining to act, as well.
It is the Government's contention that a willful failure to file a return, together with a willful
failure to pay the tax, may, without more, constitute an attempt to defeat or evade a tax within
145(b). Petitioner claims that such proof establishes only two misdemeanors under 145(a), and
that it takes more than the sum of two such misdemeanors to make the felony under 145(b). The
legislative history of the section contains nothing helpful on the question here at issue, and we must
find the answer from the section itself and its context in the revenue laws.
The United States has relied for the collection of its income tax largely upon the taxpayer's
own disclosures rather than upon a system of withholding the tax from him by those from whom
income may be received. This system can function successfully only if those within and near
taxable income keep and render true accounts. In many ways, taxpayers' neglect or deceit may
prejudice the orderly and punctual administration of the system as well as the revenues themselves.
Congress has imposed a variety of sanctions for the protection of the system and the revenues. The
relation of the offense of which this petitioner has been convicted to other and lesser revenue
offenses appears more clearly from its position in this structure of sanctions. The penalties imposed
by Congress to enforce the tax laws embrace both civil and criminal sanctions. The former consist
of additions to the tax upon determinations of fact made by an administrative agency and with no
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burden on the Government to prove its case beyond a reasonable doubt. The latter consist of penal
offenses enforced by the criminal process in the familiar manner. Invocation of one does not
exclude resort to the other.
The failure in a duty to make a timely return, unless it is shown that such failure is due to
reasonable cause and not due to willful neglect, is punishable by an addition to the tax of 5 to 25 per
cent thereof, depending on the duration of the default. But a duty may exist even when there is no
tax liability to serve as a base for application of a percentage delinquency penalty; the default may
relate to matters not identifiable with tax for a particular period; and the offense may be more
grievous than a case for civil penalty. Hence the willful failure to make a return, keep records, or
supply information when required, is made a misdemeanor, without regard to existence of a tax
liability. 145(a). Punctuality is important to the fiscal system, and these are sanctions to assure
punctual as well as faithful performance of these duties.
Sanctions to insure payment of the tax are even more varied to meet the variety of causes of
default. It is the right as well as the interest of the taxpayer to limit his admission of liability to the
amount he actually owes. But the law is complicated, accounting treatment of various items raises
problems of great complexity, and innocent errors are numerous, as appears from the number who
make overpayments. It is not the purpose of the law to penalize frank difference of opinion or
innocent errors made despite the exercise of reasonable care. Such errors are corrected by the
assessment of the deficiency of tax and its collection with interest for the delay. If any part of the
deficiency is due to negligence or intentional disregard of rules and regulations, but without intent
to defraud, five per cent of such deficiency is added thereto; and if any part of any deficiency is due
to fraud with intent to evade tax, the addition is 50 per cent thereof. Willful failure to pay the tax
when due is punishable as a misdemeanor. 145(a). The climax of this variety of sanctions is the
serious and inclusive felony defined to consist of willful attempt in any manner to evade or defeat
the tax. 145(b). The question here is whether there is a distinction between the acts necessary to
make out the felony and those which may make out the misdemeanor.
A felony may, and frequently does, include lesser offenses in combination either with each
other or with other elements. We think it clear that this felony may include one or several of the
other offenses against the revenue laws. But it would be unusual and we would not readily assume
that Congress by the felony defined in 145(b) meant no more than the same derelictions it had just
defined in 145(a) as a misdemeanor. Such an interpretation becomes even more difficult to accept
when we consider this felony as the capstone of a system of sanctions which singly or in
combination were calculated to induce prompt and forthright fulfillment of every duty under the
income tax law and to provide a penalty suitable to every degree of delinquency. The difference
between willful failure to pay a tax when due, which is made a misdemeanor, and willful attempt
to defeat and evade one, which is made a felony, is not easy to detect or define. Both must be
willful, and willful, as we have said, is a word of many meanings, its construction often being
influenced by its context. It may well mean something more as applied to nonpayment of a tax than
when applied to failure to make a return. Mere voluntary and purposeful, as distinguished from
accidental, omission to make a timely return might meet the test of willfulness. But in view of our
traditional aversion to imprisonment for debt, we would not without the clearest manifestation of
- 33 -
Congressional intent assume that mere knowing and intentional default in payment of a tax, where
there had been no willful failure to disclose the liability, is intended to constitute a criminal offense
of any degree. We would expect willfulness in such a case to include some element of evil motive
and want of justification in view of all the financial circumstances of the taxpayer.
Had 145(a) not included willful failure to pay a tax, it would have defined as misdemeanors
generally a failure to observe statutory duties to make timely returns, keep records, or supply
information -- duties imposed to facilitate administration of the Act even if, because of insufficient
net income, there were no duty to pay a tax. It would then be a permissible and perhaps an
appropriate construction of 145(b) that it made felonies of the same willful omissions when there
was the added element of duty to pay a tax. The definition of such nonpayment as a misdemeanor,
we think, argues strongly against such an interpretation.
The difference between the two offenses, it seems to us, is found in the affirmative action
implied from the term attempt, as used in the felony subsection. It is not necessary to involve this
subject with the complexities of the common-law attempt. The attempt made criminal by this
statute does not consist of conduct that would culminate in a more serious crime but for some
impossibility of completion or interruption or frustration. This is an independent crime, complete
in its most serious form when the attempt is complete, and nothing is added to its criminality by
success or consummation, as would be the case, say, of attempted murder. Although the attempt
succeed in evading tax, there is no criminal offense of that kind, and the prosecution can be only for
the attempt. We think that in employing the terminology of attempt to embrace the gravest of
offenses against the revenues, Congress intended some willful commission in addition to the willful
omissions that make up the list of misdemeanors. Willful but passive neglect of the statutory duty
may constitute the lesser offense, but to combine with it a willful and positive attempt to evade tax
in any manner or to defeat it by any means lifts the offense to the degree of felony.
Congress did not define or limit the methods by which a willful attempt to defeat and evade
might be accomplished and perhaps did not define lest its effort to do so result in some unexpected
limitation. Nor would we by definition constrict the scope of the Congressional provision that it
may be accomplished in any manner. By way of illustration, and not by way of limitation, we
would think affirmative willful attempt may be inferred from conduct such as keeping a double set
of books, making false entries or alterations, or false invoices or documents, destruction of books
or records, concealment of assets or covering up sources of income, handling of one's affairs to
avoid making the records usual in transactions of the kind, and any conduct, the likely effect of
which would be to mislead or to conceal. If the tax-evasion motive plays any part in such conduct
the offense may be made out even though the conduct may also serve other purposes such as
concealment of other crime.
In this case there are several items of evidence apart from the default in filing the return and
paying the tax which the Government claims will support an inference of willful attempt to evade
or defeat the tax. These go to establish that petitioner insisted that certain income be paid to him
in cash, transferred it to his own bank by armored car, deposited it, not in his own name but in the
names of others of his family, and kept inadequate and misleading records. Petitioner claims other
- 34 -
motives animated him in these matters. We intimate no opinion. Such inferences are for the jury.
If on proper submission the jury found these acts, taken together with willful failure to file a return
and willful failure to pay the tax, to constitute a willful attempt to evade or defeat the tax, we would
consider conviction of a felony sustainable. But we think a defendant is entitled to a charge which
will point out the necessity for such an inference of willful attempt to defeat or evade the tax from
some proof in the case other than that necessary to make out the misdemeanors; and if the evidence
fails to afford such an inference, the defendant should be acquitted.
The Government argues against this construction, contending that the milder punishment of
a misdemeanor and the benefits of a short statute of limitation should not be extended to violators
of the income tax laws such as political grafters, gamblers, racketeers, and gangsters. We doubt that
this construction will handicap prosecution for felony of such flagrant violators. Few of them, we
think, in their efforts to escape tax, stop with mere omission of the duties put upon them by the
statute, but if such there be, they are entitled to be convicted only of the offense which they have
committed.
Reversed.
--------------- [END OF SPIES CASE] -----------------Notes on Spies Affirmative Attempt Requirement.
Spies establishes that evasion requires some affirmative act other than the mere failure to file
or pay. The battleground anticipated by the Court was just how minimal must such affirmative act
be to meet this judicial spin on the attempt requirement of the statute. What other act would be
necessary to move the conduct to the level of evasion?
We will see some instances in the cases in these materials that will help frame the parameters
for distinguishing between evasion and some lesser act. For present, I would like you to consider
the following:
Spies warns that the affirmative act can be any conduct the likely effect of which would be
to mislead or to conceal. Double sets of books, false entries and the litany of other affirmative
deceptive acts cited by the Court are illustrative. The affirmative act need not itself be otherwise
illegal, so long as its purpose was to evade tax.90
Would the filing of a false W-4 in a year well beyond the statute of limitations support a
criminal conviction for failure to file in a later year if the employer continued to withhold through
the later year based upon the earlier W-4? The answer is yes,91 but why?
90
See CTM 8.06 (2008 ed.), citing United States v. Voigt, 89 F.3d 1050, 1090 (3d Cir.
1996); United States v. Jungles, 903 F.2d 468, 474 (7th Cir. 1990)and United States v. Conley, 826
F.2d 551, 556-57 (7th Cir. 1987).
91
See United States v. King, 125 F.3d 850 (7th Cir. 1997), discussed below at p. 453
below (Section 7201 conviction upheld with respect to a tax protestor who just did not get it).
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Would a taxpayers regular practice of spending all of his money, thus rendering himself
unable to pay tax, be sufficient to meet the attempt requirement for evasion? Or, is that just a mere
failure to pay, which is a separate and lesser crime as Spies discussed (and discussed more in the text
below)? The CTM admits that obstinate refusal to pay a tax even if coupled with the open,
nonsecret assignment of income is not tax evasion.92 But, the CTM also cautions that other
affirmative actions such as using secret bank accounts, using nominees and even paying other
creditors ahead of the IRS may be tax evasion. So, not surprisingly, the CTM cites cases93 for the
proposition that maintaining a cash lifestyle so as not to have assets the IRS can readily seize can
be an act of evasion.
In United States v. McGill,94 the taxpayer, a lawyer, failed to pay taxes that he had reported
on his return. The IRS attempted to collect, inter alia, through levies on the taxpayers bank
accounts. The taxpayer then ceased using the accounts and began using accounts held by his wife
or business associates. The taxpayer also opened up a new account in his own name. The Court
held that funneling the money through others' accounts supplied the affirmative act, but that using
his own new account that the IRS did not know about was not an act of evasion. The Court held:
We find that, unless a taxpayer is in the situation of giving voluntary
admissions during an investigation or a forced response to a subpoena, the failure of
the taxpayer to report the opening of an account in his or her own name in his or her
own locale cannot amount to an affirmative act of evasion. Omissions, including
failures to report, do not satisfy the requirements of 7201; the Government must
prove a specific act to mislead or conceal. See Spies, 317 U.S. at 499; Romano, 938
F.2d at 1572-73 (failure to report income is not by itself an affirmative act of
evasion). McGill testified that he opened the account on the advice of counsel in
response to IRS criticism for banking under the names of others. There is no
evidence that McGill concealed this new account from the IRS apart from the fact
that he did not inform the IRS of its existence.95
The concurring opinion, although agreeing to the result, took the majority to task over the
breadth of its language regarding the act of setting up a new bank account unknown to the IRS:
In Spies v. United States, the Supreme Court said that an affirmative willful
attempt [of tax evasion] may be inferred from . . . any conduct, the likely effect of
which would be to mislead or to conceal. This is an expansive definition, one which
takes into account that not all tax payment evaders approach their problem in the
same way. Where there is sufficient evidence, the question whether conduct
92
93
CTM 8.06[2] (2008 ed.).

E.g., United States v. Shorter, 809 F.2d 54, 57 (D.C. Cir. 1987), cert. denied, 484 U.S.
817 (1987).
94
95
964 F.2d 222 (3d Cir. 1992), cert. denied 500 U.S. 1023 (1992).
Id. at pp. 233-4 (record citations omitted).
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supports a legitimate inference of willful attempt to evade taxes is for the jury, see
Spies, 317 U.S. at 500, whose findings we must accord deference.
At the time McGill opened the PSFS account in August 1988, he was the
target of a criminal investigation for tax evasion and had been the subject of five
years of civil collection efforts by the IRS. The $9,000 the Government alleges he
deposited in the PSFS account consisted of City legal fees which had escaped an IRS
levy. Although McGill was aware these funds were subject to levy, he admitted
expending them on personal and business items. Nevertheless, he claims to have
reported them on his income tax return for that year.
I agree that, in the ordinary case, opening a personal banking account and
depositing funds in it will not by itself amount to an affirmative act of tax evasion.
But it seems to me that under the proper circumstances, this conduct may support a
legitimate inference that a taxpayer has attempted to evade payment of federal tax
liabilities. Cf. United States v. White, 417 F.2d 89, 92 (2d Cir. 1969), cert. denied,
397 U.S. 912 (1970) (allowing jury to infer affirmative act of tax evasion from fact
that defendant had maintained a separate personal banking account in a neighboring
town in which he deposited large amounts of [unreported] currency from unidentified
sources).
Assuming McGill deposited the $9,000 in City legal fees subject to levy in
the PSFS account, I would find these circumstances present here. Even though
McGill claims to have reported the $9,000 on his tax return, because he was aware
these funds were subject to levy and was the target of a criminal investigation for tax
evasion at the time, I would hold that his deposit and expenditure of the $9,000
without first notifying the IRS supports a legitimate inference that he committed an
affirmative act of tax evasion under 7201. See United States v. Eley, 314 F.2d 127,
132 (7th Cir. 1963) (upholding jury instruction which listed as an affirmative,
willful attempt to evade taxes the failure during the course of an investigation to
supply any information for purposes of a computation, assessment or collection of
income tax when such failure is found . . . to be unjustified).
However, because I agree with the majority that the Government has failed
to meet its burden in establishing that McGill in fact deposited the $9,000 which had
escaped the IRS levy in the PSFS account in August 1988, I concur in the result on
Counts 7 and 8.96
Returning to the majority opinion (as to which all judges concurred on the balance of the
case, in addressing the taxpayers willfulness defense on the counts for which it was prepared to
affirm), the Court said:
96
Id. at pp. 242-243.
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Further, the judge told the jury that McGill's inability to pay his taxes had no
bearing on willfulness. McGill vehemently asserts that he never raised inability to
pay as a defense to the evasion of payment charge, though he did assert inability to
pay as a defense to the charge of willful failure to pay. We decline to resolve the
apparent split of authority as to whether a taxpayer's inability to pay should bear on
the willfulness of his violations. Even if the inability to pay were relevant, the
defense is unavailing to McGill, who could have altered his lifestyle and thus freed
the money required to pay his tax obligations.97
---------------------United States v. Beacon Brass Co., Inc., 344 U.S. 43 (1952)
MR. JUSTICE MINTON delivered the opinion of the Court.
On March 16, 1951, a one-count indictment was returned in the United States District Court
for the District of Massachusetts against the appellees, Beacon Brass Company, a corporation, and
Maurice Feinberg, its president and treasurer. The indictment charged that in violation of
145(b)[tax evasion], the appellees have willfully attempted to evade taxes by making false
statements to Treasury representatives on October 24, 1945, for the purpose of supporting,
ratifying, confirming and concealing the fraudulent and incorrect statements and representations
made in the corporate tax return of said Beacon Brass Co., Inc., for the fiscal period ending October
31, 1944, filed on or about January 5, 1945 . . . . Section 145(b) provides in pertinent part:
imposed by this chapter or the payment thereof, shall, in addition to other penalties
provided by law, be guilty of a felony . . . . (Emphasis supplied.)
The six-year limitation period, applicable to offenses under this statute, had expired on a
charge for filing a false tax return in January 1945, but it had not expired on a charge of making false
statements to Treasury employees in October 1945. The District Court viewed the indictment as
charging the separate crimes of filing a false return and making subsequent false statements to
Treasury representatives, and dismissed the indictment as duplicitous.
On September 14, 1951, a second indictment was returned against the appellees which
repeated the charge that in violation of 145(b) they did willfully and knowingly attempt to defeat
and evade a large part of the taxes due and owing by the said corporation . . . by making certain false
and fraudulent statements and representations, at a hearing and conference before representatives
and employees of the United States Treasury Department, on or about October 24, 1945 . . . .
Reference to the allegedly false return filed in January 1945 was omitted, and instead it was charged
that the false statements were made for the purpose of concealing additional unreported net income
. . . .
97
Id. at p. 238.
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Section 35(A) of the Criminal Code, 18 U. S. C. (1946 ed.) 80 (now 18 U. S. C. (Supp. V)

1001) makes it unlawful to knowingly and willfully . . . make . . . any false or fraudulent
statements or representations . . . in any matter within the jurisdiction of any department or agency
of the United States . . . . Obviously, at the times of the indictments here, the three-year limitation
period for violations of this statute had expired as to statements made in October 1945. The District
Court concluded that since 35(A) deals specifically with false statements, Congress must be
presumed to have intended that the making of false statements should be punishable only under
35(A). Therefore, the District Court dismissed the indictment on the ground that it failed to charge
an offense under 26 U. S. C. 145(b).
We have before us two statutes, each of which proscribes conduct not covered by the other,
but which overlap in a narrow area illustrated by the instant case. At least where different proof is
required for each offense, a single act or transaction may violate more than one criminal statute.
Unlike 35(A), 145(b) requires proof that the false statements were made in a willful effort to
evade taxes. The purpose to evade taxes is crucial under this section. The language of 145(b)
which outlaws willful attempts to evade taxes in any manner is clearly broad enough to include
false statements made to Treasury representatives for the purpose of concealing unreported income.
Cf. Spies v. United States, 317 U.S. 492, 499. The question raised by the decision below is whether
by enacting a statute specifically outlawing all false statements in matters under the jurisdiction of
agencies of the United States, Congress intended thereby to exclude the making of false statements
from the scope of 145(b).
We do not believe that Congress intended to require the tax-enforcement authorities to deal
differently with false statements than with other methods of tax evasion. By providing that the
sanctions of 145(b) should be in addition to other penalties provided by law, Congress
recognized that some methods of attempting to evade taxes would violate other statutes as well.
Moreover, since no distinction is made in 35 (A) between written and oral statements, the
reasoning of the court below would be equally applicable to false tax returns which are, of course,
false written statements. But the Courts of Appeals have uniformly applied 145(b) to attempts to
evade taxes by filing false returns. Further support for our conclusion can be found in United
States v. Noveck, supra, where this Court rejected the contention that the enactment of 145(b)
impliedly repealed the general perjury statute insofar as that statute applied to false tax returns made
under oath. Finally, the enactment of other statutes expressly outlawing false statements in
particular contexts negates the assumption -- which was the foundation of the decision of the court
below -- that Congress intended the making of false statements to be punishable only under 35(A).
The appellees contend that the acts charged constitute only one crime of tax evasion which was
complete when the allegedly false tax return was filed. On the basis of this contention, appellees
seek to sustain the decision below on the grounds that the six-year statute of limitations had run, and
that the dismissal of the first indictment is res judicata and a bar to the second indictment for the
same offense. We do not consider these questions because our jurisdiction on this appeal is limited
to review of the District Court's construction of the statute in the light of the facts alleged in the
indictment.
- 39 -
The judgment of the District Court is reversed, and the cause is remanded for further
proceedings not inconsistent with this opinion.
Reversed.
----------- [END OF BEACON BRASS CASE] -----------Notes on Beacon Brass
In effect what happened in Beacon Brass was that the taxpayers false statements after the
return date set a new starting date to calculate the six year statute of limitations for tax evasion.
Normally, the six year statute date for evasion of assessment by false return starts on the date the
false return is filed.98 However, in the course of the audit, the taxpayer in Beacon Brass made false
statements in order to prevent the IRS from discovering the understatement of tax and thus started
a new six year period. In essence, the taxpayer refreshed the statute of limitations.
How far can we take Beacon Brass? Assume that a taxpayer filed a fraudulent year 01 return
in year 02 falsely claiming large net operating losses that not only wiped out his tax liability for
1984 but also carried forward to wipe out tax liabilities in year 08 (the return for which was filed
in year 09). By claiming the false net operating losses on his year 08 return filed after the criminal
statute of limitations on year 01 had expired, the taxpayer has committed a separate act of evasion
evading his year 08 taxes.99
What if, however, the taxpayer did not claim the net operating losses on his year 08 return,
realizing that he would thereby be committing a felony? He is just happy that the criminal statute
of limitations has expired on year 01. As noted above, his falsely claimed net operating losses did
save him taxes in year 01, so his civil statute of limitations is still open.100 During the course of the
audit of his year 08 return (on which he did not claim the carryforward losses), the IRS agent asks
the taxpayer for retained copies of prior returns. The taxpayer supplies him the returns for year 01
through year 07. The agent notices the large year 01 net operating loss and asks the taxpayer about
it. Then, realizing that the agent may focus on the year 01 taxes saved and assert a civil tax liability,
98
One tax nuance here is that returns are generally filed on the date the IRS receives
them. There are two key exceptions (1) a return filed before the original due date for the return
(e.g. April 15 in the case of a calendar year individual) is deemed filed on the original due date
rather than the earlier date of filing and (2) a return the IRS receives after the original due date is
deemed filed may be deemed filed earlier under the so-called timely mailing, timely filing rule.
6501(b)(1) & 7502.
99
Cf. Gandy Nursery, Inc. v. United States, 318 F.3d 631, 638-639 (5th Cir. 2003)
(holding that criminal conviction of fraud in reporting taxes in the net operating loss year (1984 in
the above example) constitutes collateral estoppel as to fraud for purposes of civil fraud penalty in
a carryforward year (1993 in the above example).); see also United States v. Josephberg, 562 F.3d
478 (9th Cir. 2009), cert. den. 130 S.Ct. 397 (2009).
100
6501(c)(1) (unlimited civil statute of limitations for fraudulent returns).
- 40 -
along with penalties and interest, for year 01 under the unlimited civil statute, the taxpayer tries to
fade the heat by lying. The taxpayer has then committed felony tax evasion for year 01 even though
the criminal statute of limitations for year 01 was not otherwise open. He has just refreshed an
otherwise closed criminal statute of limitations. He has also committed another felony - false
statements under 18 U.S.C. 1001 which we consider later because that crime is frequently charged
in tax cases.
c.
Willfulness.
(1)
Introduction.
The mens rea element, although implicit in the attempt requirement, is supplied specifically
by the willfulness requirement. The willfulness requirement, an element of tax crimes generally,
is the voluntary, intentional violation of a known legal duty. United States v. Pomponio, 429 U.S.
10, 13 (1976). The taxpayer must know that he has a duty to pay the tax and must knowingly intend
not to meet that duty. The taxpayer does not have to be an evil person, nor does the taxpayer have
to have acted with evil motive or in bad faith. All that is required is that he know the duty and
intend to violate it. The cases below will help you understand the parameters of this element.
(2)
Pomponio.
United States v. Pomponio, 429 U.S. 10 (1976)

[Introductory Note: Pomponio involves the substantive offense under 7206(1) which is commonly
referred to as tax perjury because it requires a materially false statement willfully made on a return
filed under penalty of perjury. We focus here on the willfulness requirement which is common to
tax evasion ( 7201) and tax perjury ( 7206(1)).]
OPINION: PER CURIAM.
After a jury trial, respondents were convicted of willfully filing false income tax returns in
violation of 26 U.S.C. 7206 (1). Based on its reading of United States v. Bishop, 412 U.S. 346
(1973), the Court of Appeals held that the jury was incorrectly instructed concerning willfulness,
and remanded for a new trial. The United States petitioned for certiorari. We reverse.
The respondents were charged with falsifying tax returns in two principal ways: (1) they
allegedly caused corporations they controlled to report payments to them as loans, when they knew
the payments were really taxable dividends; and (2) they allegedly claimed partnership losses as
deductions knowing that the losses were properly attributable to a corporation. Their defense was
that these transactions were correctly reported, or at least that they thought so at the time. The jury
was instructed that respondents were not guilty of violating 7206(1) unless they had signed the tax
returns knowing them to be false, and had done so willfully. A willful act was defined in the
instructions as one done voluntarily and intentionally and with the specific intent to do something
which the law forbids, that is to say with [the] bad purpose either to disobey or to disregard the law.
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Finally, the jury was instructed that [g]ood motive alone is never a defense where the act done or
omitted is a crime, and that consequently motive was irrelevant except as it bore on intent. The
Court of Appeals held this final instruction improper because the statute at hand requires a finding
of a bad purpose or evil motive. In so holding, the Court of Appeals incorrectly assumed that the
reference to an evil motive in United States v. Bishop, supra, and prior cases meant something
more than the specific intent to violate the law described in the trial judge's instruction.
In Bishop, we held that the term willfully has the same meaning in the misdemeanor and
felony sections of the Revenue Code, and that it requires more than a showing of careless disregard
for the truth. We did not, however, hold that the term requires proof of any motive other than an
intentional violation of a known legal duty. We explained the meaning of willfulness in 7206 and
related statutes:
The Court, in fact, has recognized that the word 'willfully' in these statutes
generally connotes a voluntary, intentional violation of a known legal duty. It has
formulated the requirement of willfulness as bad faith or evil intent,' or 'evil motive
and want of justification in view of all the financial circumstances of the taxpayer,
Spies, 317 U.S., 498, or knowledge that the taxpayer should have reported more
income than he did. Sansone, 380 U.S. [343,] 353. See James v. United States, 366
U.S. 213, 221 (1961).
Our references to other formulations of the standard did not modify the standard set forth in
the first sentence of the quoted paragraph. On the contrary, as the other Courts of Appeals that have
considered the question have recognized, willfulness in this context simply means a voluntary,
intentional violation of a known legal duty. The trial judge in the instant case adequately instructed
the jury on willfulness. An additional instruction on good faith was unnecessary. As an alternative
ground for ordering a new trial, the Court of Appeals held that respondents were entitled to
instructions exonerating them if they believed that the payments to them were loans and that the
losses belonged to the partnership. Our inspection of the record indicates that such instructions were
given and that they were adequate.
The respondents' other allegations of error which the Court of Appeals found it unnecessary
to reach should be considered by that court in the first instance.
The petition for certiorari is granted, the judgment of the Court of Appeals is reversed, and
the case is remanded for further proceedings consistent with this opinion.
It is so ordered.
--------[END OF POMPONIO CASE]--------------
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(3)
Cheek.
Cheek v. United States, 498 U.S. 192 (1991)

JUSTICE WHITE delivered the opinion of the Court.
Title 26, 7201 of the United States Code provides that any person who willfully attempts
in any manner to evade or defeat any tax imposed by this title or the payment thereof shall be guilty
of a felony. Under 26 U. S. C. 7203, any person required under this title . . . or by regulations
made under authority thereof to make a return . . . who willfully fails to . . . make such return shall
be guilty of a misdemeanor. This case turns on the meaning of the word willfully as used in
7201 and 7203.
I
Petitioner John L. Cheek has been a pilot for American Airlines since 1973. He filed federal
income tax returns through 1979 but thereafter ceased to file returns. He also claimed an increasing
number of withholding allowances -- eventually claiming 60 allowances by mid-1980 -- and for the
years 1981 to 1984 indicated on his W-4 forms that he was exempt from federal income taxes. In
1983, petitioner unsuccessfully sought a refund of all tax withheld by his employer in 1982.
Petitioner's income during this period at all times far exceeded the minimum necessary to trigger the
statutory filing requirement.
As a result of his activities, petitioner was indicted for 10 violations of federal law. He was
charged with six counts of willfully failing to file a federal income tax return for the years 1980,
1981, and 1983 through 1986, in violation of 26 U. S. C. 7203. He was further charged with three
counts of willfully attempting to evade his income taxes for the years 1980, 1981, and 1983 in
violation of 7201. In those years, American Airlines withheld substantially less than the amount
of tax petitioner owed because of the numerous allowances and exempt status he claimed on his W-4
forms. The tax offenses with which petitioner was charged are specific intent crimes that require the
defendant to have acted willfully.
At trial, the evidence established that between 1982 and 1986, petitioner was involved in at
least four civil cases that challenged various aspects of the federal income tax system. In all four of
those cases, the plaintiffs were informed by the courts that many of their arguments, including that
they were not taxpayers within the meaning of the tax laws, that wages are not income, that the
Sixteenth Amendment does not authorize the imposition of an income tax on individuals, and that
the Sixteenth Amendment is unenforceable, were frivolous or had been repeatedly rejected by the
courts. During this time period, petitioner also attended at least two criminal trials of persons
charged with tax offenses. In addition, there was evidence that in 1980 or 1981 an attorney had
advised Cheek that the courts had rejected as frivolous the claim that wages are not income.
Cheek represented himself at trial and testified in his defense. He admitted that he had not
filed personal income tax returns during the years in question. He testified that as early as 1978, he
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had begun attending seminars sponsored by, and following the advice of, a group that believes,
among other things, that the federal tax system is unconstitutional. Some of the speakers at these
meetings were lawyers who purported to give professional opinions about the invalidity of the
federal income tax laws. Cheek produced a letter from an attorney stating that the Sixteenth
Amendment did not authorize a tax on wages and salaries but only on gain or profit. Petitioner's
defense was that, based on the indoctrination he received from this group and from his own study,
he sincerely believed that the tax laws were being unconstitutionally enforced and that his actions
during the 1980-1986 period were lawful. He therefore argued that he had acted without the
willfulness required for conviction of the various offenses with which he was charged.
In the course of its instructions, the trial court advised the jury that to prove willfulness
the Government must prove the voluntary and intentional violation of a known legal duty, a burden
that could not be proved by showing mistake, ignorance, or negligence. The court further advised
the jury that an objectively reasonable good-faith misunderstanding of the law would negate
willfulness, but mere disagreement with the law would not. The court described Cheek's beliefs
about the income tax system and instructed the jury that if it found that Cheek honestly and
reasonably believed that he was not required to pay income taxes or to file tax returns, App. 81, a
not guilty verdict should be returned.
After several hours of deliberation, the jury sent a note to the judge that stated in part:
We have a basic disagreement between some of us as to if Mr. Cheek honestly
& reasonably believed that he was not required to pay income taxes.
....
Page 32 [the relevant jury instruction] discusses good faith
misunderstanding & disagreement. Is there any additional clarification you can give
us on this point? Id., at 85.
The District Judge responded with a supplemental instruction containing the following
statements:
[A] person's opinion that the tax laws violate his constitutional rights does not
constitute a good faith misunderstanding of the law. Furthermore, a person's
disagreement with the government's tax collection systems and policies does not
constitute a good faith misunderstanding of the law.
At the end of the first day of deliberation, the jury sent out another note saying that it still
could not reach a verdict because we are divided on the issue as to if Mr. Cheek honestly &
reasonably believed that he was not required to pay income tax. When the jury resumed its
deliberations, the District Judge gave the jury an additional instruction. This instruction stated in part
that an honest but unreasonable belief is not a defense and does not negate willfulness, and that
advice or research resulting in the conclusion that wages of a privately employed person are not
income or that the tax laws are unconstitutional is not objectively reasonable and cannot serve as
the basis for a good faith misunderstanding of the law defense. The court also instructed the jury
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that persistent refusal to acknowledge the law does not constitute a good faith misunderstanding
of the law. Ibid. Approximately two hours later, the jury returned a verdict finding petitioner guilty
on all counts. n6
n6 A note signed by all 12 jurors also informed the judge that although the jury
found petitioner guilty, several jurors wanted to express their personal opinions of
the case and that notes from these individual jurors to the court were a complaint
against the narrow & hard expression under the constraints of the law. Id., at 90. At
least two notes from individual jurors expressed the opinion that petitioner sincerely
believed in his cause even though his beliefs might have been unreasonable.
Petitioner appealed his convictions, arguing that the District Court erred by instructing the
jury that only an objectively reasonable misunderstanding of the law negates the statutory
willfulness requirement. The United States Court of Appeals for the Seventh Circuit rejected that
contention and affirmed the convictions. In prior cases, the Seventh Circuit had made clear that
good-faith misunderstanding of the law negates willfulness only if the defendant's beliefs are
objectively reasonable; in the Seventh Circuit, even actual ignorance is not a defense unless the
defendant's ignorance was itself objectively reasonable. In its opinion in this case, the court noted
that several specified beliefs, including the beliefs that the tax laws are unconstitutional and that
wages are not income, would not be objectively reasonable. Because the Seventh Circuit's
interpretation of willfully as used in these statutes conflicts with the decisions of several other
Courts of Appeals, we granted certiorari.
II
The general rule that ignorance of the law or a mistake of law is no defense to criminal
prosecution is deeply rooted in the American legal system. Based on the notion that the law is
definite and knowable, the common law presumed that every person knew the law. This
common-law rule has been applied by the Court in numerous cases construing criminal statutes. The
proliferation of statutes and regulations has sometimes made it difficult for the average citizen to
know and comprehend the extent of the duties and obligations imposed by the tax laws. Congress
has accordingly softened the impact of the common-law presumption by making specific intent to
violate the law an element of certain federal criminal tax offenses. Thus, the Court almost 60 years
ago interpreted the statutory term willfully as used in the federal criminal tax statutes as carving
out an exception to the traditional rule. This special treatment of criminal tax offenses is largely due
to the complexity of the tax laws. In United States v. Murdock, 290 U.S. 389 (1933), the Court
recognized that:
Congress did not intend that a person, by reason of a bona fide
misunderstanding as to his liability for the tax, as to his duty to make a return, or as
to the adequacy of the records he maintained, should become a criminal by his mere
failure to measure up to the prescribed standard of conduct.
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The Court held that the defendant was entitled to an instruction with respect to whether he
acted in good faith based on his actual belief. In Murdock, the Court interpreted the term willfully
as used in the criminal tax statutes generally to mean an act done with a bad purpose, or with an
evil motive.
Subsequent decisions have refined this proposition. In United States v. Bishop, we described
the term willfully as connoting a voluntary, intentional violation of a known legal duty," and did
so with specific reference to the bad faith or evil intent language employed in Murdock. Still later,
United States v. Pomponio addressed a situation in which several defendants had been charged with
willfully filing false tax returns. The jury was given an instruction on willfulness similar to the
standard set forth in Bishop. In addition, it was instructed that good motive alone is never a
defense where the act done or omitted is a crime. The defendants were convicted but the Court of
Appeals reversed, concluding that the latter instruction was improper because the statute required
a finding of bad purpose or evil motive.
We reversed the Court of Appeals, stating that the Court of Appeals incorrectly assumed
that the reference to an evil motive in United States v. Bishop, supra, and prior cases requires proof
of any motive other than an intentional violation of a known legal duty. As the other Courts of
Appeals that have considered the question have recognized, willfulness in this context simply means
a voluntary, intentional violation of a known legal duty. We concluded that after instructing the
jury on willfulness, an additional instruction on good faith was unnecessary. Taken together,
Bishop and Pomponio conclusively establish that the standard for the statutory willfulness
requirement is the voluntary, intentional violation of a known legal duty.
III
Cheek accepts the Pomponio definition of willfulness, but asserts that the District Court's
instructions and the Court of Appeals' opinion departed from that definition. In particular, he
challenges the ruling that a good-faith misunderstanding of the law or a good-faith belief that one
is not violating the law, if it is to negate willfulness, must be objectively reasonable. We agree that
the Court of Appeals and the District Court erred in this respect.
A
Willfulness, as construed by our prior decisions in criminal tax cases, requires the
Government to prove that the law imposed a duty on the defendant, that the defendant knew of this
duty, and that he voluntarily and intentionally violated that duty. We deal first with the case where
the issue is whether the defendant knew of the duty purportedly imposed by the provision of the
statute or regulation he is accused of violating, a case in which there is no claim that the provision
at issue is invalid. In such a case, if the Government proves actual knowledge of the pertinent legal
duty, the prosecution, without more, has satisfied the knowledge component of the willfulness
requirement. But carrying this burden requires negating a defendant's claim of ignorance of the law
or a claim that because of a misunderstanding of the law, he had a good-faith belief that he was not
violating any of the provisions of the tax laws. This is so because one cannot be aware that the law
- 46 -
imposes a duty upon him and yet be ignorant of it, misunderstand the law, or believe that the duty
does not exist. In the end, the issue is whether, based on all the evidence, the Government has
proved that the defendant was aware of the duty at issue, which cannot be true if the jury credits a
good-faith misunderstanding and belief submission, whether or not the claimed belief or
misunderstanding is objectively reasonable. In this case, if Cheek asserted that he truly believed that
the Internal Revenue Code did not purport to treat wages as income, and the jury believed him, the
Government would not have carried its burden to prove willfulness, however unreasonable a court
might deem such a belief. Of course, in deciding whether to credit Cheek's good-faith belief claim,
the jury would be free to consider any admissible evidence from any source showing that Cheek was
aware of his duty to file a return and to treat wages as income, including evidence showing his
awareness of the relevant provisions of the Code or regulations, of court decisions rejecting his
interpretation of the tax law, of authoritative rulings of the Internal Revenue Service, or of any
contents of the personal income tax return forms and accompanying instructions that made it plain
that wages should be returned as income.
We thus disagree with the Court of Appeals' requirement that a claimed good-faith belief
must be objectively reasonable if it is to be considered as possibly negating the Government's
evidence purporting to show a defendant's awareness of the legal duty at issue. Knowledge and
belief are characteristically questions for the fact finder, in this case the jury. Characterizing a
particular belief as not objectively reasonable transforms the inquiry into a legal one and would
prevent the jury from considering it. It would of course be proper to exclude evidence having no
relevance or probative value with respect to willfulness; but it is not contrary to common sense, let
alone impossible, for a defendant to be ignorant of his duty based on an irrational belief that he has
no duty, and forbidding the jury to consider evidence that might negate willfulness would raise a
serious question under the Sixth Amendment's jury trial provision. It is common ground that this
Court, where possible, interprets congressional enactments so as to avoid raising serious
constitutional questions. It was therefore error to instruct the jury to disregard evidence of Cheek's
understanding that, within the meaning of the tax laws, he was not a person required to file a return
or to pay income taxes and that wages are not taxable income, as incredible as such
misunderstandings of and beliefs about the law might be. Of course, the more unreasonable the
asserted beliefs or misunderstandings are, the more likely the jury will consider them to be nothing
more than simple disagreement with known legal duties imposed by the tax laws and will find that
the Government has carried its burden of proving knowledge.
B
Cheek asserted in the trial court that he should be acquitted because he believed in good faith
that the income tax law is unconstitutional as applied to him and thus could not legally impose any
duty upon him of which he should have been aware. Such a submission is unsound, not because
Cheek's constitutional arguments are not objectively reasonable or frivolous, which they surely are,
but because the Murdock-Pomponio line of cases does not support such a position. Those cases
construed the willfulness requirement in the criminal provisions of the Internal Revenue Code to
require proof of knowledge of the law. This was because in our complex tax system, uncertainty
often arises even among taxpayers who earnestly wish to follow the law, and 'it is not the purpose
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of the law to penalize frank difference of opinion or innocent errors made despite the exercise of
reasonable care.' United States v. Bishop, 412 U.S. 346, 360-361 (1973) (quoting Spies v. United
States, 317 U.S. 492 (1943)).
Given this posture of the case, we perceive no reason not to address the significance of
Cheek's constitutional claims to the issue of willfulness.
Claims that some of the provisions of the tax code are unconstitutional are submissions of
a different order. They do not arise from innocent mistakes caused by the complexity of the Internal
Revenue Code. Rather, they reveal full knowledge of the provisions at issue and a studied
conclusion, however wrong, that those provisions are invalid and unenforceable. Thus in this case,
Cheek paid his taxes for years, but after attending various seminars and based on his own study, he
concluded that the income tax laws could not constitutionally require him to pay a tax.
We do not believe that Congress contemplated that such a taxpayer, without risking criminal
prosecution, could ignore the duties imposed upon him by the Internal Revenue Code and refuse to
utilize the mechanisms provided by Congress to present his claims of invalidity to the courts and to
abide by their decisions. There is no doubt that Cheek, from year to year, was free to pay the tax that
the law purported to require, file for a refund and, if denied, present his claims of invalidity,
constitutional or otherwise, to the courts. Also, without paying the tax, he could have challenged
claims of tax deficiencies in the Tax Court, with the right to appeal to a higher court if unsuccessful.
Cheek took neither course in some years, and when he did was unwilling to accept the outcome. As
we see it, he is in no position to claim that his good-faith belief about the validity of the Internal
Revenue Code negates willfulness or provides a defense to criminal prosecution under 7201 and
7203. Of course, Cheek was free in this very case to present his claims of invalidity and have them
adjudicated, but like defendants in criminal cases in other contexts, who willfully refuse to comply
with the duties placed upon them by the law, he must take the risk of being wrong.
We thus hold that in a case like this, a defendant's views about the validity of the tax statutes
are irrelevant to the issue of willfulness and need not be heard by the jury, and, if they are, an
instruction to disregard them would be proper. For this purpose, it makes no difference whether the
claims of invalidity are frivolous or have substance. It was therefore not error in this case for the
District Judge to instruct the jury not to consider Cheek's claims that the tax laws were
unconstitutional. However, it was error for the court to instruct the jury that petitioner's asserted
beliefs that wages are not income and that he was not a taxpayer within the meaning of the Internal
Revenue Code should not be considered by the jury in determining whether Cheek had acted
willfully.
IV
For the reasons set forth in the opinion above, the judgment of the Court of Appeals is
vacated, and the case is remanded for further proceedings consistent with this opinion.
It is so ordered.
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JUSTICE SCALIA, concurring in the judgment.

I concur in the judgment of the Court because our cases have consistently held that the
failure to pay a tax in the good-faith belief that it is not legally owing is not willful. I do not join
the Court's opinion because I do not agree with the test for willfulness that it directs the Court of
Appeals to apply on remand.
As the Court acknowledges, our opinions from the 1930's to the 1970's have interpreted the
word willfully in the criminal tax statutes as requiring the bad purpose or evil motive of
intentionally violating a known legal duty. See, e. g., United States v. Pomponio; United States
v. Murdock. It seems to me that today's opinion squarely reverses that long-established statutory
construction when it says that a good-faith erroneous belief in the unconstitutionality of a tax law
is no defense. It is quite impossible to say that a statute which one believes unconstitutional
represents a known legal duty. See Marbury v. Madison, 5 U.S. 137 (1803).
Although the facts of the present case involve erroneous reliance upon the Constitution in
ignoring the otherwise known legal duty imposed by the tax statutes, the Court's new
interpretation applies also to erroneous reliance upon a tax statute in ignoring the otherwise known
legal duty of a regulation, and to erroneous reliance upon a regulation in ignoring the otherwise
known legal duty of a tax assessment. These situations as well meet the opinion's crucial test of
revealing full knowledge of the provisions at issue and a studied conclusion, however wrong, that
those provisions are invalid and unenforceable. There is, moreover, no rational basis for saying
that a willful violation is established by full knowledge of a statutory requirement, but is not
established by full knowledge of a requirement explicitly imposed by regulation or order. Thus,
today's opinion works a revolution in past practice, subjecting to criminal penalties taxpayers who
do not comply with Treasury Regulations that are in their view contrary to the Internal Revenue
Code, Treasury Rulings that are in their view contrary to the regulations, and even IRS auditor
pronouncements that are in their view contrary to Treasury Rulings. The law already provides
considerable incentive for taxpayers to be careful in ignoring any official assertion of tax liability,
since it contains civil penalties that apply even in the event of a good-faith mistake. To impose in
addition criminal penalties for misinterpretation of such a complex body of law is a startling
innovation indeed.
I find it impossible to understand how one can derive from the lonesome word willfully
the proposition that belief in the nonexistence of a textual prohibition excuses liability, but belief
in the invalidity (I. e., the legal nonexistence) of a textual prohibition does not. One may say, as the
law does in many contexts, that willfully refers to consciousness of the act but not to
consciousness that the act is unlawful. Or alternatively, one may say, as we have said until today
with respect to the tax statutes, that willfully refers to consciousness of both the act and its
illegality. But it seems to me impossible to say that the word refers to consciousness that some legal
text exists, without consciousness that that legal text is binding, i.e., with the good-faith belief that
it is not a valid law. Perhaps such a test for criminal liability would make sense (though in a field
as complicated as federal tax law, I doubt it), but some text other than the mere word willfully
would have to be employed to describe it -- and that text is not ours to write.
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Because today's opinion abandons clear and longstanding precedent to impose criminal
liability where taxpayers have had no reason to expect it, because the new contours of criminal
liability have no basis in the statutory text, and because I strongly suspect that those new contours
make no sense even as a policy matter, I concur only in the judgment of the Court.
JUSTICE BLACKMUN, with whom JUSTICE MARSHALL joins, dissenting.
It seems to me that we are concerned in this case not with the complexity of the tax laws,
but with the income tax law in its most elementary and basic aspect: Is a wage earner a taxpayer and
are wages income?
The Court acknowledges that the conclusively established standard for willfulness under the
applicable statutes is the voluntary, intentional violation of a known legal duty. That being so,
it is incomprehensible to me how, in this day, more than 70 years after the institution of our present
federal income tax system with the passage of the Income Tax Act of 1913, 38 Stat. 166, any
taxpayer of competent mentality can assert as his defense to charges of statutory willfulness the
proposition that the wage he receives for his labor is not income, irrespective of a cult that says
otherwise and advises the gullible to resist income tax collections. One might note in passing that
this particular taxpayer, after all, was a licensed pilot for one of our major commercial airlines; he
presumably was a person of at least minimum intellectual competence.
The District Court's instruction that an objectively reasonable and good-faith
misunderstanding of the law negates willfulness lends further, rather than less, protection to this
defendant, for it adds an additional hurdle for the prosecution to overcome. Petitioner should be
grateful for this further protection, rather than be opposed to it.
This Court's opinion today, I fear, will encourage taxpayers to cling to frivolous views of the
law in the hope of convincing a jury of their sincerity. If that ensues, I suspect we have gone beyond
the limits of common sense.
While I may not agree with every word the Court of Appeals has enunciated in its opinion,
I would affirm its judgment in this case. I therefore dissent.
------------[END OF CHEEK CASE]---------------Mr. Cheek won this battle, giving tax protestors everywhere some hope, but alas did not fare
well upon retrial. Cheek received a new trial with instructions now often referred to as Cheek
instructions, based on the Supreme Court opinion in his case. He was convicted nonetheless, and
his conviction was sustained.101
The so-called good faith defense sometimes the Cheek good faith defense is technically
not a defense. The Government must prove willfulness. Willfulness does not exist if the defendant
101
United States v. Cheek, 3 F.3d 1057 (7th Cir. 1993), cert. denied, 510 U.S. 1112
(1994).
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acted in good faith. Does that mean that the Government, in order to prove willfulness, must
disprove good faith? Logically, it would and, invariably, the Governments proof of willfulness will
in fact be sufficient to permit the jury to infer beyond a reasonable doubt that the defendant lacked
good faith. But defendants who want to emphasize their good faith will want the judge, in the
instructions, to instruct that good faith negates willfulness. That nuance, while implicit in the
willfulness instruction, is not as explicit as defendants desire. Generally, courts will give the
specific good faith instruction only if the evidence somehow affirmatively puts good faith in play
makes it a real issue for the jury. How does the defendant do that? The most direct way is for the
defendant to testify as to his or her good faith. But, in order to do that, the defendant will be subject
to cross-examination; frequently, the defense team will conclude that the potential benefits of the
defendant testifying (including the good faith opportunity) are less than the risks of the defendant
testifying. So the defendant will not testify. Notwithstanding some noises that the defendant is
required to testify to put good faith in play, the courts soundly reject that notion.102 Other
102
United States v. Kokenis, 662 F.3d 919, 929 (7th Cir. 2011), citing United States v.
Lindo, 18 F.3d 353, 356 (6th Cir. 1994); and United States v. Phillips, 217 F.2d 435, 442 (7th Cir.
1954).
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circumstantial evidence, including perhaps lay opinion evidence as to the defendants mental state,103
may be sufficient to put that issue in play and, if it does, the trial judge should give the instruction.104
Finally, can the jury consider the reasonableness of the defendants conduct as bearing on
good faith? The obvious answer is yes. The following is from a recent case:
Reasonableness does play a role in determining whether the defendant acted
in good faith. Good faith is a defense to the willfulness element that the government
must prove. The court instructed the jury that if it found that the defendant,
subjectively in his own mind, believed that he was not required by the law to file the
returns in question or pay the taxes, it will be your duty to find him not guilty. The
103
For example, lay opinion testimony as to the defendants mental state, including
presumably good faith, might be admissible under FRE Rule 701. See United States v. Goodman,
633 F.3d 963, 968 (10th Cir. 2011); and United States v. Abramson-Schmeiler, 2011 U.S. App.
LEXIS 23789 (10th Cir. 2011). A good case on this opportunity for lay opinion testimony on the
ultimate intent issue is United States v. Rea, 958 F.2d 1206 (2d Cir. 1992). The defendants in an
excise tax scheme were convicted for conspiracy and tax evasion. The Second Circuit noted that
both crimes required mental intent conspiracy requires intent to form the agreement and tax
evasion requires Cheek willfulness. A Government witness at trial testified that Rea had to know
of the tax evasion nature of the scheme. Defendants complained on appeal that Rea's knowledge
should have been excluded from evidence as a matter of principle, on the ground that the state of
Rea's knowledge was an ultimate issue in the case. The Second Circuit held that FRE Rules 701
and Rule 704(a) made the argument untenable. The Court concluded (pp. 1214-5):
Since neither Rule 701 nor Rule 704(a) limits the subject matter of lay opinion
testimony, there is no theoretical prohibition against allowing lay witnesses to give
their opinions as to the mental states of others. See generally 3 J. Weinstein & M.
Berger, Weinstein's Evidence P701[02], at 701-19 to 701-21 (1991). Accordingly,
these Rules do not, in principle, bar a lay witness from testifying as to whether a
defendant in a criminal prosecution had the requisite knowledge.
Rea establishes that this opportunity for opinion testimony is a two way street. But, it is critical for
the proponent of such evidence to anticipate and satisfy the predicate requirements for introducing
such opinion testimony. Indeed, at least where the opinion testimony is proffered by a government
agent based on his or her investigation, courts are careful to insure that the predicate FRE 701
conditions are met and that the sole function is not to instruct the jury as to what it should do on the
ultimate issue(s): See United States v. Garcia, 413 F.3d 201 (2d Cir. 2005). Thus, for instance, a
government agent participating in a sting may give lay opinion testimony as to his eyewitness
observation of the actions of the targets participating but would not be allowed to give lay opinion
testimony as to the overall conclusions of his or her investigation. Uses of investigating agent
opinion testimony also implicate the other predicates as well.
104
See United States v. Wisenbaker, 14 F.3d 1022, 1027 (5th Cir. 1994). See also CTM
40.05[1][a] (2008 ed.) dealing with the reliance on professional subset of the good faith defense: A
reliance-on-advice-of-accountant instruction may be warranted even without per se testimony that
the defendant relied on the accountants advice, so long as the circumstances support an inference
that he did so rely.
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jury could use the reasonableness of the defendant's explanation for his actions to
assess whether the defendant's version was credible. The more unreasonable the jury
perceives the defendant's reasons for not paying taxes to be, the more the jury would
likely infer that the defendant's proffered reasons were pretextual. Similarly, the
more reasonable the defendant's reasons were, the more likely it is that the jury
would credit them as being truthful. If the jury believed the testimony of the
defendant and that testimony reflected an honest mistake in law, then the jury could
find that the defendant acted in good faith. Accordingly, the court properly instructed
the jury that the reasonableness of the defendant's actions is a factor [the jury] can
consider in determining whether the defendant acted in good faith.105
(4)
Tax Protestors.
Cheek was a tax protestor case. The good faith defense is often raised in tax protestor cases,
although it may apply in other types of cases.
Consider the following from the Governments perspective.106
The often patently frivolous arguments routinely made by illegal tax
protesters are not confined to oral representations. Illegal tax protesters are
renowned for their penchant to inundate prosecutors with paperfrivolous motion
after frivolous motion. Illegal tax protesters often represent themselves, making
motion practice even more difficult. As a result, trying to figure out what their
arguments are can be a difficult task.
Most of the common tactics and defenses used by illegal tax protesters have
been routinely dismissed by the courts. Illegal tax protesters, however, ignore these
decisions and claim that no one from the Government will answer their questions.
Some of the more common tactics and defenses that have been raised by illegal tax
protesters and rejected by the courts are: (1) the income tax is voluntary,(2) wages
are not income,(3) the Sixteenth Amendment was never properly ratified, and (4) the
IRS has the duty to prepare tax returns for the taxpayer.
One defense that must be carefully handled is the good faith defense, which
is used to refute willfulness. Illegal tax protesters routinely attempt to prove that
they believed they did not have to file tax returns or pay taxes. Many of the
reasons they use, such as the ones mentioned above, may seem unbelievable.
Nevertheless, this is an issue that must go to the jury. In the seminal case of Cheek
v. United States, 498 U.S. 192, 201 (1991), the Supreme Court held that a taxpayers
belief that he or she was not required to file a tax return, however incredible such
a misunderstanding of and beliefs about the law might be, does not have to be
105
United States v. Aldridge, 2012 U.S. App. LEXIS 448 (6th Cir. 2010).
Jennifer E. Ihlo, The Gold Fringed Flag: Prosecution of the Illegal Tax Protestor, 46
USA Bulletin (No. 3) 15 (April 1998).
106
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objectively reasonable! Rather, the standard is a subjective one. Still, this defense
is not insurmountable.
In an attempt to present a good faith defense, most illegal tax protesters will
attempt to introduce copies of the Constitution, the IRS Special Agents Handbook,
various court decisions, protester publications, as well as other documents. The
admissibility of these documents is generally left to the discretion of the court. To
limit or prevent an illegal tax protester from introducing these documents into
evidence, consider arguing that (1) the content of these documents are more
prejudicial than probative and (2) the admissibility of these documents invades the
province of the court to instruct the jury on the law. The key is to distinguish
between a misunderstanding of the law versus a disagreement with the law. Whether
to object to the admission of these protester documents, however, is a trial strategy
that varies from case to case and circuit to circuit.
Whether or not the documents themselves are admitted into evidence, a
defendant will generally be allowed to testify about his or her beliefs during the
prosecution period and what he or she relied on to form those beliefs. Evidence
about what the law is or should be may be excluded. However, evidence that is
relevant to a jurys determination of what a defendant thought the law was may not
be excluded. A defendant who testifies that he or she knew the law, but disagrees
withor does not likethe law, is not entitled to a good faith instruction.
If legal documents, protester publications or similar protester-type documents
are introduced or if the defendant is allowed to testify about what the law is, ask for
a limiting instruction. Such an instruction should remind the jury that the
document/statement is the defendants understanding of what the law was; that the
jury is the judge of the facts, not the law; and that the document/statement was
admitted solely for the purpose of showing the defendants state of mind and not to
prove the actual requirements of the law. If the document/statement is a misstatement
of the law, ask the court to instruct the jury with a correct statement of the law.
Finally, because illegal tax protesters do not limit their illegal schemes to the
Federal arena, do not forget to look for documents that may be on file with a state or
county government, such as state tax returns or property tax filings. These records,
or the lack thereof, may serve as evidence of willfulness in the Federal case.
Consider also the Courts response to the Cheek defense in a recent protestor case.107 The
taxpayer in the case was charged with a violation of 7202, a tax crime relating to failure to
withhold on employees wages (I cover this tax crime below). The taxpayer testified that one reason
he did not withhold was that the IRC, which is over 7,000 pages long, contains an extensive (and
107
United States v. Simkanin, 420 F.3d 397 (5th Cir. 2005), cert. den. 541 U.S. 1111
(2006). In the quotes below, I omit certain citations for readability.
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exclusive) list of industries and activities which did not include his employees industries and
activities.
In Cheek v. United States, 498 U.S. 192, 201-03 (1991), the Supreme Court
defined willfulness for prosecutions under the IRC as requiring a voluntary,
intentional violation of a known legal duty. The Court reasoned that because of the
complexity of the tax laws, willful criminal tax offenses must be treated as an
exception to the general rule that ignorance of the law or a mistake of law is no
defense to criminal prosecution. Moreover, the Court found that a defendant's
good-faith belief that he was not violating the law need not be objectively reasonable
to negate willfulness. However, the Court distinguished a defense based on the
defendant's good-faith belief that he was acting within the law from a defense based
on the defendant's views that the tax laws are unconstitutional or otherwise invalid.
The Court held that the latter belief, regardless of how genuinely held by the
defendant, does not negate the willfulness element. Thus, the Court concluded that
evidence pertaining to a defendant's beliefs that the tax laws are invalid is irrelevant
to establishing a legitimate good-faith defense.
The availability of the good-faith defense, while undeniably sound, creates
a number of complications and challenges for a district court beyond those arising
in the usual criminal trial, in which the defendant's beliefs about what the law
requires are not at issue. The defendant in a criminal tax trial, unlike most other
defendants, must be permitted to present evidence to show what he purportedly
believed the law to be at the time of his allegedly criminal conduct. At the same
time, however, the district court must be permitted to prevent the defendant's alleged
view of the law from confusing the jury as to the actual state of the law, especially
when the defendant has constructed an elaborate, but incorrect, view of the law based
on a misinterpretation of numerous IRC provisions taken out of proper context. See,
e.g., United States v. Barnett, 945 F.2d 1296, 1300 (5th Cir. 1991) (stating that the
jury must know the law as it actually is respecting a taxpayer's duty to file before it
can determine the guilt or innocence of the accused for failing to file as required).
The district court in this case, like other courts in similar cases, struggled to balance
these two competing concerns when it answered the jury's confusion as to the correct
interpretation of the law, which unsurprisingly resulted from Simkanin's testimony
about his own erroneous beliefs about the law. Thus, it is with this set of
circumstances in mind that we consider Simkanin's arguments on appeal.
During its deliberations, the jury sent a note to the district judge asking the
following question:
Since no proof has been made that the defendant and his employees
are in an occupation listed in those 7,000 [pages], are we to conclude
that they are, in fact, not in that 7,000, or do we need to read all 7,000
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to see what the defendant was referring to, and in fact, wasn't listed
in the 7,000[?]
The court responded to the jury's question by stating:
Now, in answer to your note: You are instructed that you do
not need to concern yourself with whether defendant's employees are
in an occupation listed in those 7,000. The Court has made a legal
determination that within the meaning of Title 26, United States
Code, Section 7202, during the years 1997, 1998, 1999, 2000, 2001,
and 2002, [Arrow], through its responsible officials, had a legal duty
to collect, by withholding from the wages of its employees, the
employees' share of the social security taxes, Medicare taxes, and
federal income taxes, and to account for those taxes and pay the
withheld amounts to the United States of America. You are to follow
that legal instruction without being concerned whether there are
certain employers who are not required to collect and withhold taxes
from the wages of their employees.
Of course, you will bear in mind in your deliberations all
other instructions the Court has given you concerning the law
applicable to this case.
Defense counsel objected that this answer was tantamount to an instructed verdict against
defendant on the good faith defense which Cheek allowed him to present. The Court then
responded:
In arguing that the district court's response directed the jury to disregard his
good-faith defense, Simkanin relies on United States v. Burton, 737 F.2d 439 (5th
Cir. 1984), a case involving a defendant's failure to file income tax returns. In
Burton, the district court instructed the jury that the court has ruled as a matter of
law that a good faith belief that wages are not income is not a defense to the charges
in this case. We reversed, holding that a defendant's good-faith belief that the tax
laws did not require him to file returns (as opposed to a belief that the tax laws are
invalid or unconstitutional) would have negated the willful element of the charged
offense and therefore constituted a valid defense. Burton is easily distinguishable,
however, because unlike the district court in Burton, the district court in the present
case did not explicitly instruct the jury to disregard the defendant's beliefs about the
applicability of the tax laws. Rather, the court instructed the jury that the defendant's
purported view of the law that the fact that the IRC did not list his business
activities alleviated him from a legal duty to withhold taxes was incorrect. Thus,
the district court acted properly under the circumstances. We see nothing in the
district court's instruction that would have led the jury to believe that it must
disregard Simkanin's good-faith defense on the willfulness element, especially
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because the court specifically instructed the jury to keep in mind the other
instructions, which included its instruction on willfulness. Thus, the jury remained
free to decide the contested issue in the trial, i.e., whether Simkanin's violations of
the tax laws were willful as that term was properly defined in the jury instructions.
The Court then addressed the Defendants assertion that he was entitled to a specific
instruction on the good faith defense. At trial, the district court had declined the request for a good
faith instruction, but had given the standard instructions on willfulness being the voluntary,
intentional violation of a known legal duty which was set forth in Cheek and its predecessor,
Pomponio. The Court said:
Accordingly, the district court in the present case was not required to include
a specific instruction on good-faith because it adequately instructed the jury on the
meaning of willfulness under Cheek and Pomponio. In other words, Simkanin's
requested instruction was substantially covered in the charge given to the jury
regarding willfulness. In addition, taken together, the trial, charge, and closing
argument laid the theory of the defense squarely before the jury, and the lack of the
requested instruction did not seriously impair Simkanin's ability to present
effectively his good-faith defense.
Finally, Simkanin complains that the phrase known legal duty in the
instructions did not make it clear that the legal duty must have been known to the
defendant. This claim ignores the next sentence of the instructions, which stated:
For the government to establish willfulness as to Counts 1-12 of the indictment, it
must prove beyond a reasonable doubt as to the count in consideration that defendant
knew of the requirements of federal law . . . and that he voluntarily and intentionally
caused [Arrow] to fail to comply with these requirements. Similarly, Simkanin
ignores the actual language of the district court's instructions when, citing FIFTH
CIRCUIT PATTERN JURY INSTRUCTIONS: CRIMINAL 1.37, he asserts that
the district court did not instruct the jury that a defendant did not knowingly
commit a tax offense if he acted by mistake. In fact, as noted above, the district
court explicitly instructed the jury that knowingly, as that term has been used in
these instructions, means that the act was done voluntarily and intentionally, not
because of a mistake or accident. Thus, Simkanin's argument fails.
Other courts are more sensitive to the importance of allowing the defense to obtain an
instruction on its good faith theory of defense and not inclined to simply find the general Cheek
willfulness instruction to cover the defense.108
108
See e.e., United States v. Morris, 20 F.3d 1111 (1th Cir. 1994).
- 57 -
(5)
Conscious Avoidance and Its Variations.
Willfulness requires specific intent. The taxpayer must know the legal obligation as a
predicate to intending to violate the known standard. Does this foreclose prosecution if the best the
Government can prove is that the taxpayer deliberately or consciously avoided knowing his legal,
thereby offering the possibility of a defense to a crime requiring his specific knowledge
(willfulness)? This concept is variously referred to as conscious avoidance, willful blindness, willful
ignorance, deliberate ignorance, or some variation thereof, but taking the lead from the CTM, I will
usually refer to it as conscious avoidance.109 The construct says, in effect, that a person can have
the requisite mental state of knowledge or willfulness when he or she deliberately chooses to be
ignorant of the facts or the law applicable to the facts that make the conduct a crime with the
required mental state.110
In Global Tech Appliances, Inc. v. SEB, ___ U.S. ___, 131 S. Ct. 2060 (2011), the Supreme
Court recently addressed conscious avoidance as meeting a knowledge requirement in a civil case
but summarized the concept in criminal cases:
The doctrine of willful blindness is well established in criminal law. Many
criminal statutes require proof that a defendant acted knowingly or willfully, and
courts applying the doctrine of willful blindness hold that defendants cannot escape
the reach of these statutes by deliberately shielding themselves from clear evidence
of critical facts that are strongly suggested by the circumstances. The traditional
rationale for this doctrine is that defendants who behave in this manner are just as
culpable as those who have actual knowledge. Edwards, The Criminal Degrees of
Knowledge, 17 Mod. L. Rev. 294, 302 (1954) (hereinafter Edwards) (observing on
the basis of English authorities that up to the present day, no real doubt has been
cast on the proposition that [willful blindness] is as culpable as actual knowledge).
109
DOJ CTM 8.08.[4] at n. 9 (2008) (Such instructions also have been referred to as
deliberate ignorance, ostrich, or head-in-the-sand instructions. To minimize the potential for
confusion with the meaning of willfulness as it relates to the defendants intent, the Tax Division
recommends using the term conscious avoidance or deliberate ignorance and avoiding the
phrase willful blindness.). Although following DOJ Taxs lead to use a single term generally, I
do not embrace its attempt to distinguish conscious avoidance from willfulness in the criminal tax
statutes; as I note later in the text, I view the concept, however labeled, as permitting the trier of fact
to conclude that what looks like conscious avoidance is an attempt to disguise willfulness. See also
Justin C. From, Avoiding Not-So-Harmless Error: The Appropriate Standards for Appellate Review
of Willful-Blindness Jury Instructions, 97 Iowa L. Rev. 275, 281 (2011) (as to the various terms
used for the concept). The Second Circuit recently used the term conscious avoidance but noted
that the Supreme Court apparently prefers the term willful blindness based on the Global Tech
opinion discussed in the text below. United States v. Coplan, ___ F.3d ___, ___ n. 39, 2012 U.S.
App. LEXIS 24613 (2d Cir. 11/29/12).
110
United States v. Vallone, 698 F.3d 416, 481 (7th Cir. 2012) (a defendant's willful
blindness to the law can merit a conscious avoidance instruction just as his willful blindness to the
facts can, citing United States v. Stadtmauer, 620 F.3d 238, 256-257 (3d Cir. 2010)).
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It is also said that persons who know enough to blind themselves to direct proof of
critical facts in effect have actual knowledge of those facts. See United States v.
Jewell, 532 F. 2d 697, 700 (CA9 1976) (en banc).
This Courts opinion more than a century ago in Spurr v. United States, 174
U. S. 728 (1899), n6111 while not using the term willful blindness, endorsed a
similar concept. The case involved a criminal statute that prohibited a bank officer
from willfully certifying a check drawn against insufficient funds. We said that a
willful violation would occur if the [bank] officer purposely keeps himself in
ignorance of whether the drawer has money in the bank. Id., at 735. Following our
decision in Spurr, several federal prosecutions in the first half of the 20th century
invoked the doctrine of willful blindness. n7112 Later, a 1962 proposed draft of the
Model Penal Code, which has since become official, attempted to incorporate the
doctrine by defining knowledge of the existence of a particular factto include a
situation in which a person is aware of a high probability of [the facts] existence,
unless he actually believes that it does not exist. ALI, Model Penal Code 2.02(7)
(Proposed Official Draft 1962). Our Court has used the Codes definition as a guide
in analyzing whether certain statutory presumptions of knowledge comported with
due process. See Turner v. United States, 396 U. S. 398, 416417 (1970); Leary v.
United States, 395 U. S. 6, 4647, and n. 93 (1969). And every Court of Appeals
with the possible exception of the District of Columbia Circuit, see n. 9, infra has
fully embraced willful blindness, applying the doctrine to a wide range of criminal
statutes.
****
While the Courts of Appeals articulate the doctrine of willful blindness in
slightly different ways, all appear to agree on two basic requirements: (1) the
111
[n6 of opinion] The doctrine emerged in English law almost four decades earlier and
became firmly established by the end of the 19th century. Edwards 298301. In American law, one
of the earliest references to the doctrine appears in an 1882 jury charge in a federal prosecution. In
the charge, the trial judge rejected the great misapprehension that a person mayclose his eyes,
when he pleases, upon all sources of information, and then excuse his ignorance by saying that he
does not see anything. See United States v. Houghton, 14 F. 544, 547 (DC NJ).
112
[n7 of opinion] United States v. Yasser, 114 F. 2d 558, 560 (CA3 1940) (interpreting
the crime of knowingly and fraudulently concealing property belonging to the estate of a bankrupt
debtor to include someone who closed his eyes to facts which made the existence of the receiver
or trusteeobvious); Rachmil v. United States, 43 F. 2d 878, 881 (CA9 1930) (per curiam) (same);
United States v. Erie R. Co., 222 F. 444, 448451 (DCNJ 1915) (approving a willful ignorance
jury instruction to a charge that a rail carrier knowingly granted a concession to a shipper); Grant
Bros. Constr. Co. v. United States, 13 Ariz. 388, 400, 114 P. 955, 959 (1911) (interpreting the crime
of knowingly encouraging the importation of contract laborers to include those who willfully and
intentionally ignored facts and circumstances known to them, which would have led to [actual]
knowledge).
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defendant must subjectively believe that there is a high probability that a fact exists
and (2) the defendant must take deliberate actions to avoid learning of that fact. We
think these requirements give willful blindness an appropriately limited scope that
surpasses recklessness and negligence. Under this formulation, a willfully blind
defendant is one who takes deliberate actions to avoid confirming a high probability
of wrongdoing and who can almost be said to have actually known the critical facts.
See G. Williams, Criminal Law 57, p. 159 (2d ed. 1961) (A court can properly
find wilful blindness only where it can almost be said that the defendant actually
knew). By contrast, a reckless defendant is one who merely knows of a substantial
and unjustified risk of such wrongdoing, see ALI, Model Penal Code 2.02(2)(c)
(1985), and a negligent defendant is one who should have known of a similar risk
but, in fact, did not, see 2.02(2)(d).113
The problem, of course, engaged by Justice Kennedy in his dissent, is that ignorance is not
knowledge and, when Congress imposed the element of knowledge (willfulness in a tax crimes
setting), Congress did not say that it meant anything less than the word knowledge (or willfulness)
is interpreted to mean. Notwithstanding this criticism, critical mass seems to be in favor of
permitting ignorance, if conscious, to be a substitute for knowledge (or willfulness). At least in my
mind, a more satisfying way to address the oxymoron of ignorance being a substitute for knowledge
is to reframe the issue. The conscious avoidance concept sets up two extremes for analysis: One
extreme is the taxpayer who has actual knowledge of the facts and the resulting legal duty and
intends to avoid his legal duty, which is the mental state required by tax crimes and some other
crimes (as well as some civil liabilities). That is all the Cheek / Pomponio class definition of tax
evasion speaks to and, as stated, actual knowledge and intent to avoid is required. The other extreme
is the taxpayer who is ignorant of the facts or the legal duty. The conscious avoidance concept
posits that there is something in between these extremes where ignorance of the facts and thus of
the legal duty can be a conscious choice which bespeaks not ignorance but real knowledge and thus
intent to violate the law (whatever it is). Justice Kennedys concern which I share is that, if the
Cheek / Pomponio properly defines tax fraud to require specific intent, then ignorance, whether
deliberate or otherwise, is not specific intent.114 Certainly, Congress could have legislated that
conscious avoidance will suffice for criminal culpability (one can persuasively argue that the
difference between specific intent and conscious avoidance is minor or nonexistent on a culpability
scale), but Congress did not do that. Still, the courts through a process of interpretation apparently
expand the language clearly bespeaking actual knowledge and intent to include conscious avoidance.
I think the better resolution is that the jury may consider the defendants objective conduct or
subjective claims that might suggest conscious avoidance as really part of a deception to disguise
113
Global Tech, supra, pp. ___ - ___.

See also United States v. Mapelli, 971 F.3d 284 (9th Cir. 1991) (reversing conviction
after conscious avoidance instruction) It is unclear whether the Courts concern was that the
evidence did not permit the instruction rather than a broadside attack in the instruction in any event.
Mapelli may this be viewed as consistent with the mainstream holdings that the instruction should
be given only where the facts fairly raise the question of deliberate ignorance. If the facts only
permit an up or down as to whether the defendant actually intended to violate a known legal duty,
most courts agree that the instruction is inappropriate.
114
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actual knowledge and intent to violate a known legal duty.115 If the jury then concludes that the
defendant intended to violate a known legal duty, he is guilty; if not, he is not guilty. This may
sound like semantics, but I think it is important semantics when Congress has defined the crime as
requiring specific intent and has not chosen to define it to include deliberate ignorance or conscious
avoidance.
Some justify the doctrine by an interpretation of Cheek which offered the classic definition
of willfulness as required intentional violation of a known legal duty.116 The Supreme Court in
Cheek was dealing with and distinguishing two constructs. The first is where the defendant knew
the laws command and intended to violate it. The second is where the defendant in good faith did
not know the laws command and therefore did not intend to violate it. There is an intermediate
situation not dealt with in those two constructs where the defendant in bad faith chose not to know
the facts that required laws command or chose not to know the laws command even if he or she
knew the facts. Under either scenario, he would not know that the laws requirements for his
conduct.117 Ergo, he could not have specifically intended to violate the law. In this intermediate
situation, it is the defendants affirmative bad faith in not knowing the legal obligation that permits
the defendant to be convicted under the conscious avoidance doctrine. The conceptual problem I
have with this analysis is that Cheek is clear that a lack of knowledge of the duty can be objectively
unreasonable and still preclude conviction. But, a jury may view the objective unreasonableness of
the knowledge of the duty as conscious avoidance of knowledge of the duty and convict even in the
absence of proof beyond a reasonable doubt that the defendant had the intent required by the law.
Specifically, the jury or even a judge as trier of fact may convict upon finding that the defendant
115
I like this instruction from Edward James Debitt & Charles B. Blackmar, Federal Jury
Practice and Instructions, 17.09 (4th ed. 1992), quoted in see Julie R. OSullivan, Federal White
Collar Crime: Cases and Materials 114 (West 2012).:
The element of knowledge may be satisfied by inferences drawn from proof that a
defendant deliberately closed his eyes to what would otherwise have been obvious
to him. A finding beyond a reasonable doubt of conscious purpose to avoid
enlightenment would permit an inference of knowledge. Stated another way, a
defendants knowledge of a fact amy be inferred from willful blindness to the
existence of the fact.
The Fifth Circuit pattern instruction that I quote in the text below captures the same concept of using
conscious avoidance in conjunction with all the facts of the case to create a permissible inference
beyond a reasonable doubt that the defendant has the requisite knowledge. See also United States
v. Skilling, 554 F.3d 529, 548-49 (5th Cir. 2009), vacated on other grounds, ___ U.S. ___, 130 S.
Ct. 2896 (2010). Other authorities do not word the instruction quite so crisply as to reconciling the
tension inherent in the element of knowledge (willfulness) and the concept of something less than
knowledge (willfulness) being the basis for conviction. For other formulations, see Professor
OSullivans casebook at the same page.
116
See Rachel Zuraw, Sniping Down Ignorance Claims: The Third Circuit in United
States v. Stadtmauer Upholds Willful Blindness Instructions in Criminal Tax Cases, 56 Vill. L. Rev.
779, 787 (2012).
117
Remember that a specific knowledge of the law requirement such as willfulness in
the tax crimes does make ignorance of the law an excuse.
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should have know or was reckless in not knowing or some formulation of negligent in not knowing.
Would that suffice in a tax crime required specific intent to violate the law? Should it suffice?
The conscious avoidance concept is presented to a jury in an instruction. I give examples
of such an instruction below, but here is a good predicate discussion from DOJs CTM:
8.08[4] Conscious Avoidance/Willful Blindness Instruction
Most courts have ruled that if there is evidence that the
defendant deliberately avoided acquiring knowledge of a fact or the
law, the jury may infer that the defendant actually knew of the fact or
the law and was merely trying to avoid giving the appearance (and
incurring the consequences) of knowledge. n10 In such a case, the use
of a conscious avoidance instruction may be appropriate.
n10.
Even if the defendant successfully avoided actual knowledge of the fact, [t]he required
knowledge is established if the accused is aware of a high probability of the existence of the
fact in question unless he actually believes it does not exist. United States v. Fingado, 934
F.2d 1163, 1166 (10th Cir. 1991).
[Discussion of Global-Tech Appliances, Inc. v. SEB S.A., 131 S. Ct. 2060 (2011)
omitted here because discussed in the text above]
Although Global-Tech Appliances has seemingly approved the use of the
conscious avoidance instructions, it is important to note that circuit courts have
approved their use only under proper circumstances. Indeed, at least one court has
said that the use of such an instruction is rarely appropriate.
Accordingly, prosecutors should take care to ensure that a conscious
avoidance instruction is given only when the facts warrant its use and that the court
complies with the relevant rules of the circuit when giving such an instruction. A
conscious avoidance instruction is appropriate only when the defendant purposely
contrives to avoid learning all the facts, as when a drug courier avoids looking in a
secret compartment he sees in the trunk of a car, because the courier knows full well
that he is likely to find drugs there.
Furthermore, in a tax case, the language of any conscious avoidance
instruction must not conflict with the governments obligation to prove the voluntary,
intentional violation of a known legal duty. See 8.08. Care must be taken to ensure
that the conscious avoidance instruction applies only to the element of "knowledge,"
and does not extend to the government's obligation to prove a "voluntary, intentional
violation." When a deliberate ignorance or conscious avoidance instruction is given,
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the jury should also be given a separate Good Faith instruction, which expressly
directs the jury not to convict for negligence or mistake.118
Faced with such facts, the Government will likely request a jury charge as follows, tailored
to any specific case law in the circuit:
Knowledge of Falsehood
(Deliberate Ignorance)
The element of knowledge may be satisfied by inferences drawn from proof
that a defendant deliberately closed his eyes to what would otherwise have been
obvious to him.
A finding beyond a reasonable doubt of a conscious purpose to avoid
enlightenment would permit an inference of knowledge. Stated another way, a
defendant's knowledge of a fact may be inferred from willful blindness to the
existence of the fact.
It is entirely up to you as to whether you find any deliberate closing of the
eyes and the inferences to be drawn from any such evidence. Although knowledge
may be inferred from the defendant's behavior, you must still find that he had actual
knowledge. However, a showing of mistake, negligence, carelessness, recklessness,
or even gross negligence is not sufficient to support a finding of either willfulness
or knowledge.119
The Fifth Circuit pattern jury instruction couples the instruction with the definition of
knowingly as follows:
The word knowingly, as that term has been used from time to time in these
instructions, means that the act was done voluntarily and intentionally, not because
of mistake or accident.
[You may find that a defendant had knowledge of a fact if you find that the
defendant deliberately closed his eyes to what would otherwise have been obvious
to him. While knowledge on the part of the defendant cannot be established merely
by demonstrating that the defendant was negligent, careless, or foolish, knowledge
can be inferred if the defendant deliberately blinded himself to the existence of a
fact.]120
118
DOJ CTM 8.08[4] (2008), (case citations, most quotation marks omitted and most
footnotes omitted).
119
DOJ CTM (2008), Jury Instructions, 26.7201-19.
120
Fifth Circuit Pattern Jury Instruction 1.37 (2001 edition). The instruction is presented
as deliberate ignorance of a fact. Fact in this context is the fact of deliberate ignorance of knowledge
of the law, which is a fact (as opposed to a legal) question because it relates to the defendants state
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The Fifth Circuit has cautioned, however, that the instruction is appropriate only when
defendant claims a lack of guilty knowledge and the proof at trial supports an inference of deliberate
indifference.121 The evidence must show (1) subjective awareness of a high probability of the
existence of illegal conduct, and (2) purposeful contrivance to avoid learning of the illegal
conduct.122
Judge Posner addressed the problems with the instruction as follows:
The most powerful criticism of the ostrich instruction is, precisely,
that its tendency is to allow juries to convict upon a finding of negligence for
crimes that require intent. The criticism can be deflected by thinking
carefully about just what it is that real ostriches do (or at least are popularly
supposed to do). They do not just fail to follow through on their suspicions
of bad things. They are not merely careless birds. They bury their heads in
the sand so that they will not see or hear bad things.123 They deliberately
avoid acquiring unpleasant knowledge. The ostrich instruction is designed
for cases in which there is evidence that the defendant, knowing or strongly
suspecting that he is involved in shady dealings, takes steps to make sure that
he does not acquire full or exact knowledge of the nature and extent of those
dealings. A deliberate effort to avoid guilty knowledge is all the guilty
knowledge the law requires. To know, and to want not to know because one
suspects, may be, if not the same state of mind, the same degree of fault. A
good example of a case in which the ostrich instruction was properly given
is United States v. Diaz, 864 F.2d 544, 550 (7th Cir. 1988). The defendant,
a drug trafficker, sought to insulate himself from the actual drug transaction
so that he could deny knowledge of it, which he did sometimes by absenting
of mind at a particular time.
121
United States v. Threadgill, 172 F.3d 357, 368 (5th Cir. 1999), cert. denied, 528 U.S.
871 (1999); see also United States v. Kaplan, 490 F.3d 110, 127-128 (2007) (giving the Second
Circuits iteration of the predicates for the instruction); and United States v. Anthony, 545 F.3d 60,
64-66 (1st Cir. 2008) (giving the First Circuits iteration of the predicates for the instruction).
122
Id.; and United States v. Nguyen, 493 F.3d 613, 619 (5th Cir. 2007).
123
[Authors footnote] In United States v. Black, 530 F.3d 596, 604 (7th Cir. 2009),
vacated and remanded ___ U.S. ___ 130 S. Ct. 2963 (U.S. 2010), Judge Posner later came to the
defense of the ostrich as follows:
The reference of course is to the legend that ostriches when frightened bury
their head in the sand. It is pure legend and a canard on a very distinguished bird.
Zoological Society of San Diego, Birds:Ostrich,
www.sandiegozoo.org/animalbytes/t-ostrich.html (visited June 12, 2008) (When an
ostrich senses danger and cannot run away, it flops to the ground and remains still,
with its head and neck flat on the ground in front of it. Because the head and neck are
lightly colored, they blend in with the color of the soil. From a distance, it just looks
like the ostrich has buried its head in the sand, because only the body is visible). It
is too late, however, to correct this injustice.
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himself from the scene of the actual delivery and sometimes by pretending
to be fussing under the hood of his car.
The critical question so far as Janis's guilt or innocence was concerned is
simple (to pose, not necessarily to answer): what did Janis know? Did he know that
he was renting his house for use as a wire-room, or did he believe that he was renting
his house to the Orlando crew for some private purpose of theirs unconnected with
gambling? (Even criminals have private lives.) The ostrich instruction did not
advance this inquiry; it confused it, by pointing the jury to circumstances of
deliberate avoidance of knowledge that did not exist. As we said in United States
v. Bigelow, 914 F.2d 966, 971 (7th Cir. 1990), when the facts require the jury to
make a binary choice between actual knowledge and complete innocence, the
ostrich instruction should not be given.
The true intermediate case between a clearly proper giving of the ostrich
instruction because the defendant did physical acts to insulate himself from
knowledge, as in Diaz, and the clearly improper giving of the instruction because the
only issue is the defendant's actual knowledge or complete ignorance, is the case of
purely psychological avoidance. Josefik was such a case. It is inconceivable that
Josefik did not believe that the scotch was stolen, and in context all the challenged
instruction [the ostrich instruction] meant is that he could not get off the hook simply
by resolutely refusing to find out for sure whether it was stolen. In other words, the
deliberate effort to avoid guilty knowledge that we said is all the guilty knowledge
the law requires can be a mental, as well as a physical, effort -- a cutting off of one's
normal curiosity by an effort of will. There is no evidence of either sort of effort
here.124
In view of the Pomponio-Cheek insistence upon violation of a known duty, the question not
yet definitively resolved is whether the intentional disregard instruction is appropriate in a tax case
requiring willfulness?125 Most trial courts avoid confronting the conceptual issue by constraining
the concept with a reminder to the jury that the Government must in all events prove that the
defendant intentionally violated a known legal duty. As suggested in the Fifth Circuits pattern jury
instruction, conduct not rising to the level of willful blindness even if extremely careless, is not
criminalized. Conceptually, depending upon the degree of carelessness, it may only be a hairs
difference between criminalized willful blindness and careless disregard for the truth.
Considering the potential for jury misunderstanding of the concept, Courts require that the
judge be very careful in the charge to the jury. For example, the Second Circuits clear holding is
that a conscious avoidance charge must communicate two points: (1) that a jury may infer
124
United States v. Giovanetti, 919 F.2d 1223, 1228-1229 (7th Cir. 1990) (some citations
omitted)
125
Compare United States v. London, 66 F.3d 1227, 1239-42 (1st Cir. 1995) (instruction
appropriate) with United States v. Retos, 25 F.3d 1220, 1229-30 (3rd Cir. 1994) (instruction
inappropriate).
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knowledge of the existence of a particular fact if the defendant is aware of a high probability of its
existence, (2) unless the defendant actually believes that it does not exist.126 To reinforce its
insistence on these charges, the Second Circuit recently said:
Indeed, we have repeatedly emphasized that the prosecutor should request
that the high probability and actual belief language be incorporated into every
conscious avoidance charge. We ordered that the opinion [so holding] be circulated
to all Assistant United States Attorneys engaged in criminal prosecutions in the
Circuit.127
What happens if the trial judge, after properly instructing the jury on the knowledge element
of the crime, also improperly instructs the jury on conscious avoidance instruction and the jury
returns a general verdict of guilty? Is the general verdict of guilty tainted because it could have been
based on conscious avoidance or can the trial court or a reviewing court indulge the assumption that
the general verdict was based on actual knowledge (willfulness in the case of tax crimes)? This
pattern was encountered in a recent case.128 The defendant there urged that the government failed
to present evidence Hillman deliberately acted to avoid knowledge. The Court held (referring to
the concept as deliberate ignorance):
This argument has a fatal flaw. Hillman does not challenge the sufficiency of the
evidence supporting his conviction based on his actual knowledge of the scheme.
Nor does he challenge the actual knowledge instruction, itself, as improper. As we
clarify below, because he does not challenge the sufficiency of the evidence on a
theory of actual knowledge, our case law precludes reversal of the conviction on the
basis of insufficient evidence supporting an alternate theory of deliberate ignorance.
The court cited an earlier Tenth Circuit conscious avoidance case in which it held:
when there is sufficient evidence to support a conviction on one theory of guilt on
which the jury was properly instructed [actual knowledge], we will not reverse the
conviction on the ground that there was insufficient evidence to convict on an
alternative ground on which the jury was instructed [conscious avoidance].129
126
United States v. Kaiser, 609 F.3d 556, 566 (2d Cir. 2010) (quoting and citing other
Second Circuit cases (quotations and citations omitted).)
127
Id. For similar cautions on the use of the conscious avoidance instructions, see
United States v. Skilling, 554 F.3d 529, 548-49 (5th Cir. 2009), vacated on other grounds, ___ U.S.
___, 130 S. Ct. 2896 (2010).
128
United States v. Hillman, 642 F. 3d. 929 (10th Cir. 2011).
129
United States v. Corralles, 608 F.3d 654 (10th Cir. 2010). Corrales relied upon
Griffin v. United States, 502 U.S. 46 (1991) which held that, in a defraud conspiracy case, where
the court instructed the jury on two alleged objects, one of which had sufficient evidence in the
record but the second of which arguably did not, the general verdict can be sustained if there were
sufficient evidence to support guilt as to one of the objects but not the other.
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I am troubled by this holding because, at bottom, it rests on the assumption that the jury got it right.
In my view, an equally persuasive assumption is that the jury got it wrong. However, the best view
is that one cannot really say or assume that the jury got it right or wrong and in that case a new trial
with proper instructions seems to me to be the right result. This, of course, is one of the strongest
reasons that trial courts need to be very careful in permitting the conscious avoidance instruction in
the first instance. On its face it dilutes the statutorily mandated knowledge requirement (willfulness
in the case of tax crimes) and leads to potential jury verdicts in which one can have no confidence
in circumstances in which the instruction should not have been given.
Finally, one of the risks to asserting ignorance as a defense to a specific knowledge crime
is that the defendant may have to testify in order to assert it meaningfully. Those actions which
might suggest ignorance deliberate or otherwise might also bespeak knowledge and a deliberate
effort to hide specific intent. In a white collar crime case where the defense is that the defendant did
not have the statutorily require mens rea of specific knowledge and intent, testifying can open the
defendant up to cross-examination across the board which can further incline the jury to convict.
(6)
Reliance on Professional.
First man: I have a CPA do my income tax return.

Second man: Why do you do that?
First man: It saves me time.
Second man: How much time?
First man: Maybe 5 to 10 years.
-Old Joke130
A defendant will frequently assert that he or she lacked willfulness because he or she relied
upon a tax professional. This is a Cheek argument and technically is an argument that the
Government failed to meet its burden to prove willfulness rather than a defense per se. The
Government thus has to show that the defendant did not rely upon the tax professional in order to
show willfulness.131 But, as in Cheek, the defendant has to put the defense in play by introducing
130
Quoted in Burgess J.W. Raby and William L. Raby, Penalty Protection for the
Taxpayer: Circular 230 and the Code, 2005 TNT 105-65.
131
In United States v. Stadtmauer, 620 F.3d 237, 257 n. 22 (3d Cir. 2010), the Court
expressed this concept: [T]o prove willfulness beyond a reasonable doubt, the Government would
have to negate the taxpayer's claim that he relied in good faith on the advice of his accountant.
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some evidence of reliance on the tax professional.132 Once the defendant does that,133 it is then the
Governments burden to show that the taxpayer did not rely.
If the defendant does put the reliance defense in play, the following is a typical instruction
that the Government will request to advise the jury of what it must consider with respect to the
defense:
A good faith reliance upon the advice of a qualified tax accountant is also a complete
defense to the charges because such a reliance is inconsistent with the intent required
to commit these crimes. In order for the defendant to rely on the advice of a qualified
tax accountant in good faith, the defendant must (1) make full and complete
disclosure of all tax-related information, (2) to a qualified tax accountant, (3) actually
rely upon and follow the advice that was provided, (4) without reason to believe that
the advice was not correct.134
A similarly worded instruction for a defense of reliance on an attorney was approved by the Seventh
Circuit in Cheek after retrial on remand from the Supreme Courts landmark decision in that case.135
However, even if the defendant properly invokes the defense by introducing evidence of reliance,
the trial courts decision to reject the proffered instruction may be affirmed on appeal if the
instructions on balance adequately covered the point even though not with the express language.136
132
In United States v. Kottwitz, 614 F.3d 1241, 1272 (11th Cir. 2010), opinion revised
in part not here relevant, 627 F.3d 1383 (11th Cir. 2010), the Court held that the evidentiary burden
to put the defense in play was extremely low.
Perhaps obvious to most readers of this book, I do note that the taxpayers alleged reliance
on advice of a professional in the form of statements made to the taxpayer is not inadmissible
hearsay. It is not proffered to establish the truth of the statements but to establish that the statements
were made, as to which the taxpayer would be a competent first hand witness. See e.g., United
States v. Moran, 493 F.3d 1002, 1012 (9th Cir. 2007).
133
The CTM asserts that reliance is an affirmative defense. CTM 12.07[2] (2008 ed.).
Some courts refer to it as an affirmative defense, but I question whether that is correct. See
Stadtmauer two footnotes up. The defendant bears no burden of pleading or proving the defense,
but does have a production burden to put the defense in play by presenting evidence to make it a jury
issue as to which the Judge must instruct the jury. See United States v. Wilson, 887 F.2d 69, 73 (5th
Cir. 1989).
134
See United States v. Lewis, ND Cal 2/9/07 No. C 05-00638, unofficially reported at
2007 TNT 32-18; see also United States v. Charroux, 3 F.3d 827, 831 (5th Cir. 1993) (to rely on this
affirmative defense, the defendant must show that he relied in good faith on the professional and
that he provided the professional complete information). As I note elsewhere, however, this is not
a defense and the defendant need not show anything (at least in the sense of meeting some type of
burden of persuasion as to the defense).
135
United States v. Cheek, 3 F.3d 1057, 1061 (7th Cir. 1993)
136
United States v. Powers, 702 F.3d 1 (1st Cir. 2012) (after questioning whether the
defendant properly put the reliance on professional defense in play, the Court noted that ample
good-faith instructions cured any possible harm to the defendants, pointing to the good faith
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One way the Government can meets its burden is through the tax professional. The tax
professional may have a bias to remember the events in a way that favors the professional rather than
the defendant.137 By asserting reliance on the tax professional, the taxpayer waives any privilege
(other than his own Fifth Amendment privilege, unless he has to waive it to assert the defense) that
might otherwise apply. The tax professional may be called by the Government. Often the tax
professional can testify as to certain representations made by the taxpayer or advice given to the
taxpayer and that alone may be sufficient to rebut the defense. Indeed, if there is no affirmative
evidence of proper advice by the tax professional, the defendant may be convicted on the tax
professionals testimony that it was his usual practice to give such proper advice.138 Perhaps even
more dangerously, any hope to successfully mount the defense may require the taxpayer to take the
stand, thereby waiving his or her Fifth Amendment privilege.139 Doing so will open up the
defendant to cross examination on the reliance issue and any other issue. That can be dangerous by
itself, but just focusing on the reliance issue, if the jury finds the defendant not credible, that alone
could lead to conviction and then, if the sentencing judge finds the defendant to have perjured
instructions which clearly signaled to the jury that good faith was a defense and that reliance on a
professional would be good faith defeating a criminal intent to evade taxes.). This notion that a
properly requested instruction that is denied may be cured because implicit in the other instructions
that were given is a commonly employed device to avoid reversing a conviction.
137
The professional will also often have some potential adverse bias because the
professional is unlikely to admit that he or she violated the standards of the profession, committed
malpractice or, worse, that he or she committed the crime. Thus, the professional will often not give
up what the defendant needs. For example, in United States v. Yip, 2010 U.S. App. LEXIS 4639
(9th Cir. 2009) (unpublished), the taxpayer was tried for tax perjury for answering the foreign bank
account question on 1040 Schedule B in the negative and failing to file FBARs. The defendants
tax preparer, an accountant, apparently could not remember whether he asked the particular
defendant about foreign accounts for the period in question but testified that it was his usual
practice to review the question with him. The Ninth Circuit held that this was sufficient to permit
the jury to infer that that occurred for the return in issue and sustained the conviction. Now, the Yip
decision is too cryptic to determine whether the tax preparers self serving bias influenced his
testimony or affected the jury inference, but practitioners must recognize the danger. Obviously,
in Yip, if the preparer had stopped with just a statement that he or she had no recollection of
discussing the question with the defendant, that would have been good for the defendant; the
professional, however, went further to testify about usual practice, and that was bad for the
defendant.
138
See the Yip case in the prior footnote.
139
As with the good faith defense (of which the reliance on professional is just a
variation), it is should be possible in some cases to raise the defense without the defendant taking
the stand. See United States v. Wisenbaker, 14 F.3d 1022, 1027 (5th Cir. 1994) (good faith
defense); and see also CTM 40.05[1][a] (2008 ed.) dealing with the reliance on professional subset
of the good faith defense: A reliance-on-advice-of-accountant instruction may be warranted even
without per se testimony that the defendant relied on the accountants advice, so long as the
circumstances support an inference that he did so rely.
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himself or herself (a conclusion at least by the jurys rejection of the testimony by finding the
defendant guilty), there may be a sentencing enhancement consequence.140
More often, where the defendant asserts reliance on the tax professional as negating
willfulness, the defendant will have not made an affirmative misrepresentation to the tax
professional; rather he or she will have failed to advise the tax professional as to the matters that
would affect the tax reporting on the return. The usual setting for this type omission is failure to tell
the accountant preparing the return of some fact or facts that would increase the tax liability
reported. As the instruction quoted above indicates and the cases hold, the defense requires that the
defendant have made full disclosure to the accountant.141 Reading these statements literally would
mean that the defendants failure to disclose precludes the defense whether the failure was
intentional or unintentional. Can that be the case under Cheek? The tax laws are complex, and the
facts necessary to resolve a tax issue may not be known to a taxpayer. A defendant may thus have
failed to advise the accountant of a fact or facts simply from ignorance rather than an attempt to
mislead the accountant into reporting a tax liability that is less than the amount properly due.
Doesnt Cheek require that, in failing to make full disclosure to the accountant, the taxpayer knew
that he was failing to make full disclosure, thus using the accountant as an unwitting tool to effect
the tax crime?
Finally, even if the return preparer on the information given by the taxpayer arguably should
have smoked out the problem, the return preparers negligence is still no defense if the Government
can otherwise prove the taxpayers intentional violation of a known legal duty. In a recent case,142
the defendant sought to introduce expert testimony that the return preparer knew or should have
known of the omission of income, but the trial judge sustained the Governments objection to the
evidence. The First Circuit held that, even if the return preparers conduct were negligent, the mere
failure to discover and properly treat the undisclosed income would not be a defense in a case where
the evidence showed beyond a reasonable doubt that the taxpayer willfully omitted the income. The
First Circuit did acknowledge that, in cases where the preparers neglect could be relevant
(presumably where the evidence is not overwhelming as to the taxpayers intent), such expert
evidence might be admissible at trial. So, for a defendant asserting on a reliance on professional
defense, the taxpayer should focus on this case as a roadmap for convincing the trial judge at the trial
to admit the evidence as reasonably bearing on defendants reliance.
(7)
Complexity and Uncertainty in the Law
Since criminal conduct requires the intentional violation of a known legal duty, one cannot
be guilty of a crime if the legal duty is not certain. One defense to a tax crime is that the duty upon
140
See S.G. 3C1.1. United States v. Ellis, 548 F.3d 539 (7th Cir. 2008). For a
cautionary lesson, see United States v. Dehlinger, 2010 U.S. App. LEXIS (4th Cir. 2010)
(unpublished).
141
E.g., United States v. Bishop, 291 F.3d 1100, 1107 (9th Cir. 2002), cert. denied 547
U.S. 1176 (2003).
142
United States v. Pierre, 599 F.3d 19 (1st Cir. 2010).
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which the criminal charge is based is not sufficiently certain to put the defendant on notice that
failure to honor the uncertain duty could subject him or her to criminal charges.
The Supreme Court addressed this concept in James v. United States, 366 U.S. 213 (1961).
The issue was whether James could be prosecuted under 7201 for failing to report and pay tax on
embezzled income. James had in fact been convicted, meaning that the jury had determined that he
had intentionally violated a legal duty known to him. The question was whether, because of legal
uncertainty as to the duty, he could be convicted even if he had a subjective intent to violate a duty
that he knew. In order to resolve that issue the Court had to determine whether embezzled funds
were income taxable under the Code and, if so, whether James could be prosecuted for failure to
report the embezzled proceeds. This sets up the issue quite nicely, for the fact that the Court had
to resolve the substantive issue -- i.e., whether embezzled funds were taxable -- meant that the issue
was not without doubt. Indeed, the reason that it was in doubt was because the Supreme Court, in
an earlier case (Commissioner v. Wilcox, 327 U.S. 404 (1946)), had held that embezzled funds were
not income for federal tax purposes. Between the Courts decisions in Wilcox and James), the
Supreme Court decided in Rutkin v. United States, 343 U.S. 130 (1952) that extorted funds were
income. Although the Court in Rutkin had expressly declined to overrule Wilcox, the Courts
analysis in Rutkin undercut the rational for Wilcox. Indeed, in James, the Court said that
examination of the reasoning used in Rutkin leads us inescapably to the conclusion that Wilcox was
thoroughly devitalized. Yet, Wilcox stood unreversed, so the issue was whether James could be
criminally prosecuted for failure to report embezzlement proceeds that the unreversed Supreme
Court authority squarely on point held was not income.
The Supreme Court started its analysis in James by taking the step it had declined to take in
Rutkin holding that embezzled funds are income, thus overruling Wilcox. The dissenting opinions
take the court to task on that issue, but I do not want you to be concerned about the pro's and con's
in the debate over whether embezzled funds are or should be taxable income under the Code. What
I want you to understand is that, at the time of the taxpayer's embezzlement in question James could
not have known that he had a legal duty to report the embezzled funds as income, for Wilcox had
not been overruled even though an intervening Supreme Court case had undercut its theoretical
foundations. James may have thought indeed, in the case, James actually did think (so the jury
found) he had such a duty and intended to violate the legal duty that he thought existed. The
problem moving the Supreme Court to reverse was that the that duty itself was unknowable in any
objective legal sense because of the state of the Supreme Court authority. After holding that
embezzled funds were, after all, income (thus overruling its prior decision), the Court in James
addressed the question of whether James could be prosecuted for willfully failing to report that
income while Wilcox's holding was still unreversed precedent. The Court said:
But, we are dealing here with a felony conviction under statutes which apply
to any person who willfully fails to account for his tax or who willfully attempts
to evade his obligation. In Spies v. United States, 317 U.S. 492, 499, the Court said
that 145(b) of the 1939 Code embodied the gravest of offenses against the
revenues, and stated that willfulness must therefore include an evil motive and want
of justification in view of all the circumstances. Id., at 498. Willfulness involves
a specific intent which must be proven by independent evidence and which cannot
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be inferred from the mere understatement of income. Holland v. United States, 348
U.S. 121, 139.
We believe that the element of willfulness could not be proven in a criminal
prosecution for failing to include embezzled funds in gross income in the year of
misappropriation so long as the statute contained the gloss placed upon it by Wilcox
at the time the alleged crime was committed. Therefore, we feel that petitioner's
conviction may not stand and that the indictment against him must be dismissed.143
The bottom line holding is that, given the confusion as to the objective legal duty, James
could not be prosecuted. It did not matter that the jury had determined that James had willfully
failed to report the income, a holding which logically meant that James had not placed any reliance
on Wilcox144 and, moreover, had knowingly and intentionally failed to meet the duty implicitly
created by Rutkin. It did not matter if James had the darkest of motives vis-a-vis the federal tax
system. All that mattered was that, as a matter of law regardless of the facts, the legal duty was
uncertain and thus could not support a criminal prosecution.
James thus stands squarely for the proposition that a defendant cannot be prosecuted for a
crime of willfulness (at least willfulness in the criminal tax laws) regardless of his actual motive to
violate a legal duty that he thought he had when, objectively and as a matter of law, the legal duty
was not certain. One line of defense to tax crimes spawned by this holding in James is that the
underlying legal duty is sufficiently uncertain in the James sense. There are key cases that illustrate
this defense.
However, before turning to the key cases, I want to deal with the conceptual issues inherent
in James that may be easily and erroneously conflated. James itself held that uncertainty in the law
can preclude prosecution regardless of a defendants intention to violate what he or she may think
is a known legal duty. In this inquiry, the defendants actual intent is irrelevant, and conceptually
therefore it is not a jury issue but a judge issue that the judge pre-empts without the existence of
actual intent being relevant. This issue turns upon the legal conclusion as to whether the law is
knowable meaning that it sets a discernible legal duty. Knowability is a legal issue for the court,
as the Supreme Court held in James. The issue for the jury is whether the defendant has willfully
violated that knowable legal duty. That is a factual issue for the jury that is only addressed after
143
366 U.S., at pp. 221-222.

Justice Clark made this point as follows: Even if that not be true, in my view the
proof shows conclusively that petitioner, in willfully failing to correctly report his income, placed
no bona fide reliance on Wilcox. Id. at p. 241. Justice Harlan, with Justice Frankfurter concurring,
reasoned: But since it does not appear that petitioner's possible reliance on the Wilcox doctrine was
considered below, Spies and Holland make it appropriate for us to send the case back for a new trial.
They do not support foreclosing the Government from even undertaking to prove that the petitioner's
conduct was willful in this respect. Id at . P. 244. Justices Clark, Harlan and Frankfurter would
have permitted conviction based on evil motive or willfulness alone regardless of any uncertainty
in the law which was resolved only after the crime was committed. That notion failed to carry the
majority in the case.
144
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the court first determines that the legal duty is knowable. (Actually, as in James, that determination
can be made after the defendant has been found guilty by reversing the conviction.) This may sound
like semantics, but the difference is, I think, critical. For example, a defendant should be able to
argue that the law is not knowable in a James sense and thus foreclose prosecution altogether. In
this argument, the defendant should marshal all of the legal ambiance that would suggest that that
the law does not meet the standard of knowability for criminal prosecution requiring willfulness.
If that legal argument fails, the factual issue for the jury becomes whether the defendant violated a
legal duty known to him. At least arguably, the defendant should be able to introduce evidence as
to uncertainty in the law in order to prove by inference that he or should did not have the required
intent to violate a known legal duty. (The interplay among the competing opinions in James seems
to make it clear that this was a good factual defense if James had been aware of the legal uncertainty;
I recommend re-reading the James opinions all of them and the text and footnote discussion of
James above.)
One of the most controversial cases is United States v. Garber.145 In Garber, the taxpayer
had a rare form of blood, the periodic sale of the plasma from which drew high compensation. The
taxpayer did not report the income. The Government charged her under 7201 with evading income
taxes. The taxpayer urged, consistent with James, that uncertainty as to taxability of blood
prevented her prosecution for tax evasion. The plurality opinion in that case agreed as follows:
A tax return is not criminally fraudulent simply because it is erroneous.
Willfulness is an essential element of the crime charged. As such, the government
must prove beyond a reasonable doubt that the defendant willfully and intentionally
attempted to evade and defeat income taxes for each year in question by filing with
the IRS tax returns which she knew were false. [Citing Pomponio and Bishop.] It is
not enough to show merely that a lesser tax was paid than was due. Nor is a
negligent, careless, or unintentional understatement of income sufficient. [Citing
Holland and Murdock.] The government must demonstrate that the defendant
willfully concealed and omitted from her return income which she knew was taxable.
When the taxability of unreported income is problematical as a matter of law,
the unresolved nature of the law is relevant to show that defendant may not have
been aware of a tax liability or may have simply made an error in judgment.
Furthermore, the relevance of a dispute in the law does not depend on whether the
defendant actually knew of the conflict. In United States v. Critzer, 498 F.2d 1160
(4th Cir. 1974), the Fourth Circuit reversed a criminal tax fraud conviction against
an Eastern Cherokee Indian who failed to report a portion of her income derived
from land held by the United States in trust for the Eastern Cherokee Band. The
evidence clearly established that the underreporting was intentional. Whether the
income was taxable, however, was a disputed question dependent on the
interpretation of certain land allotment statutes, which the court did not resolve.
Instead, it reversed the conviction because of the absence of authority definitively
governing the situation. The court's language is particularly apt here:
145
607 F.2d 92 (5th Cir. 1979) (en banc).
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As a matter of law, defendant cannot be guilty of willfully

evading and defeating income taxes on income, the taxability of
which is so uncertain that even co-ordinate branches of the United
States Government plausibly reach directly opposing conclusions.
As a matter of law, the requisite intent to evade and defeat income
taxes is missing. The obligation to pay is so problematical that
defendant's actual intent is irrelevant. Even if she had consulted the
law and sought to guide herself accordingly, she could have had no
certainty as to what the law required.
Critzer differs from this case in that the defendant there had been advised by
the Bureau of Indian Affairs that the income received from the transactions on the
Reservation was exempt from taxation. The fact that Garber did not have the benefit
of such official advice does not persuade us that the result here should be different.
The Critzer court did not so limit its holding:
It is settled that when the law is vague or highly debatable, a
defendant actually or imputedly lacks the requisite intent to violate it.
To hold otherwise would advocate convicting an unsophisticated taxpayer who failed
to seek expert advice as to whether certain income was taxable while setting free a
wise taxpayer who could find advice that taxes were not due on the identical type of
debatably taxable income.
That Critzer was not decided on the basis of the defendant's actual intent is
further evidenced by the reasoning of the court and its reliance on James v. United
States, 366 U.S. 213(1961). In James, the Supreme Court put to rest a dispute over
the taxability of embezzled funds. Fifteen years before James, the Court had held
such funds non-taxable. CIR v. Wilcox, 327 U.S. 404 (1946). Subsequently a
realigned Court undermined the viability of Wilcox by deciding that extortion money
was taxable, distinguishing Wilcox on tenuous grounds. Rutkin v. United States, 343
U.S. 130 (1952). When the taxability of embezzled funds again reached the Court in
James, it decided that Rutkin had in effect overruled Wilcox and that embezzled
monies were taxable. Nevertheless, the court reversed James' conviction for
willfully failing to report embezzled funds in violation of section 7201 because of the
uncertainty of the law created by Wilcox. Significantly, neither James nor the cases
following James required actual reliance on Wilcox to negate willful intent. As
noted in Critzer:
the uncertainty created by Wilcox as a matter of law precluded a
demonstration of willfulness, without regard to the defendant's
actual state of mind with respect to his knowledge or reliance on
Wilcox.
498 F.2d at 1163.
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Both Critzer and James involved disagreements among recognized authorities

which were more clearly documented than the theories presented here. James
involved conflicting Supreme Court decisions, and in Critzer the Bureau of Indian
Affairs and the Internal Revenue Service strongly disagreed on the taxability of the
income. In the case presently before us, as conceded by all the experts who testified,
there is a dearth of authority directly supporting either argument. However, the fact
that the question has never before evoked anything more than theories on either side
adds to rather than detracts from the critical conflict upon which defendants criminal
liability hinges. Neither position is frivolous, and the fact that both are urged without
clear precedential support in law demonstrates that the court should not have
restricted the evidence or instructed as it did.
The tax treatment of earnings from the sale of blood plasma or other parts of
the human body is an uncharted area in tax law. The parties in this case presented
divergent opinions as to the ultimate taxability by analogy to two legitimate theories
in tax law. The trial court should not have withheld this fact, and its powerful impact
on the issue of Garber's willfulness, from the jury. In a case such as this where the
element of willfulness is critical to the defense, the defendant is entitled to wide
latitude in the introduction of evidence tending to show lack of intent.146
The Ninth Circuit recently summarized this defense as follows:
The element of willfulness cannot obtain in a criminal tax evasion case unless
the law clearly prohibited the conduct alleged in the indictment. Schulman, 817
F.2d at 1359; see also James v. United States, 366 U.S. 213, 221-22 (1961) (vacating
taxpayer's conviction for failure to report embezzled funds as income because
conflicting caselaw rendered the predicate tax statute ambiguous when applied to
embezzled funds). Without sufficient clarity in the law, taxpayers lack the fair
notice demanded by due process so that they may conform their conduct to the law.
United States v. Dahlstrom, 713 F.2d 1423, 1427 (9th Cir. 1983) (citing United
States v. Batchelder, 442 U.S. 114, 123 (1979)). However, a lack of prior appellate
rulings on the topic does not render the law vague, nor does a lack of previously
litigated fact patterns deprive taxpayers of fair notice. See Russell, 804 F.2d at 575
(citing United States v. Ingredient Tech. Corp., 698 F.2d 88, 96 (2d Cir. 1983)
(stating that it was immaterial that there was no prior litigation directly on point)).
Thus, criminal prosecution is permissible when it is clear beyond any doubt that
[the conduct] is illegal under established principles of tax law . . . . Russell, 804
F.2d at 575. 147
146
607 F.2d 97-99. See also United States v. Harris, 942 F.2d 1125, 1132 (7th Cir. 1991)
(holding that, since willfulness for a tax violation requires voluntary, intentional violation of a
known and therefore knowable legal duty. if the tax obligation is sufficiently in doubt
willfulness is impossible as a matter of law, and the defendants actual intent is irrelevant.
(citations omitted)).
147
United States v. George,420 F.3d 991, 995-996 (9th Cir. 2005).
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Concerned about the line of cases exemplified by Garber, the Government attempts to limit
the damage through the following analysis.
Care should be taken to distinguish the average criminal tax case from a case
such as Garber, which was based on unique, indeed near bizarre, facts. United
States v. Burton, 737 F.2d 439, 444 (5th Cir. 1984); see also United States v. Daly,
756 F.2d 1076, 1083-84 (5th Cir. 1985). In Burton, the Fifth Circuit explained and
limited its opinion in Garber. The court stated that apart from those few cases where
the legal duty pointed to is so uncertain as to approach the level of vagueness, the
abstract question of legal uncertainty of which a defendant was unaware is of
marginal relevance, explaining that [e]vidence of legal uncertainty, except as it
relates to defendants effort to show the source of his state of mind, need not be
received, at least where . . . the claimed uncertainty does not approach vagueness and
is neither widely recognized nor related to a novel or unusual application of the law.
Burton, 737 F.2d at 444. And, in United States v. Curtis, 782 F.2d 593, 598-600 (6th
Cir. 1986), the Sixth Circuit rejected Garber on the following grounds: (1) Garber
allows juries to find that uncertainty in the law negates willfulness even if the
defendant was unaware of the uncertainty; (2) it distorts the experts role and
intrudes upon the judges duty to inform the jury about the law; and, (3) it requires
the jury to assume the judges responsibility to rule on questions of law.
In those few courts that have recognized uncertainty in the law as a potential
defense, the court looks to see whether the law clearly prohibited the defendants
alleged conduct. See United States v. Solomon, 825 F.2d 1292, 1297 (9th Cir. 1987)
(explaining that application of decision in United States v. Dahlstrom, 713 F.2d
1423, 1428 (9th Cir. 1983), is limited to mere advocacy of tax shelter program). In
Dahlstrom, the court reversed the convictions of the defendants, who had advocated
the creation of tax shelters to investors, because the legality of the shelters was
completely unsettled. Dahlstrom, 713 F.2d at 1423, 1425, 1428. Taxpayers have
fair notice of a schemes illegality if it is clear that it is illegal under established
principles of tax law, regardless of whether an appellate court has so ruled. See
United States v. Krall, 835 F.2d 711, 714 (8th Cir. 1987). Compare United States v.
Mallas, 762 F.2d 361, 361-365 (4th Cir. 1985) (coal mining tax shelter providing
deductions of advance minimum royalty payments raised novel questions of tax law
so vague that defendant lacked requisite specific intent) with Krall, 835 F.2d at 711,
713, 714 ([a]lthough precise foreign trust arrangement used by Krall had not yet
been declared illegal, there is no doubt the scheme violated well-established
principles of tax law; thus defendant could not claim that his conviction violated
due process); United States v. Tranakos, 911 F.2d 1422, 1431 (10th Cir. 1990)
(illegality of sham transactions to avoid tax liabilities is well-settled); United States
v. Schulman, 817 F.2d 1355, 1359-60 (9th Cir. 1987) (tax shelters based on sham
transactions clearly illegal); and United States v. Crooks, 804 F.2d 1441, 1449 (9th
Cir. 1986) (The doctrine of substance versus form is well ensconced in tax law.)
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To minimize problems presented by trying to establish willfulness at trial,

items turning on reasonably debatable interpretations of the Tax Code and
questionable items of income should be eliminated from the case; and, whenever
possible, complicated facts should be simplified. This is advantageous for purposes
of presentation of the case to the jury: it strengthens the governments argument that
there is no doubt that the defendant committed criminal acts to evade taxes, because
the taxability and tax consequences were known to the taxpayer.148
Given the fact that the uncertainty of law defense is firmly grounded on the Supreme Courts
James decision, is the Government right in suggesting that only a few courts recognize the
defense? James requires that all courts recognize the defense.
UNITED STATES v. HARRIS
942 F.2d 1125 (7th Cir. 1991)
David Kritzik, now deceased, was a wealthy widower partial to the company
of young women. Two of these women were Leigh Ann Conley and Lynnette
Harris, twin sisters. Directly or indirectly, Kritzik gave Conley and Harris each more
than half a million dollars over the course of several years. For our purposes, either
Kritzik had to pay gift tax on this money or Harris and Conley had to pay income
tax. The United States alleges that, beyond reasonable doubt, the obligation was
Harris and Conley's. In separate criminal trials, Harris and Conley were convicted
of willfully evading their income tax obligations regarding the money, and they now
appeal.
Under Commissioner v. Duberstein, 363 U.S. 278, 285 (1960), the donor's
intent is the critical consideration in distinguishing between gifts and income. We
reverse Conley's conviction and remand with instructions to dismiss the indictment
against her because the government failed to present sufficient evidence of Kritzik's
intent regarding the money he gave her. We also reverse Harris' conviction. The
district court excluded as hearsay letters in which Kritzik wrote that he loved Harris
and enjoyed giving things to her. These letters were central to Harris' defense that
she believed in good faith that the money she received was a nontaxable gift, and
they were not hearsay for this purpose.
We do not remand Harris' case for retrial, however, because Harris had no
fair warning that her conduct might subject her to criminal tax liability. Neither the
tax code, the Treasury Regulations, or Supreme Court or appellate cases provide a
clear answer to whether Harris owed any taxes or not. The closest authority lies in
a series of Tax Court decisions but these cases favor Harris' position that the
money she received was not income to her. Under this state of the law, Harris could
not have formed a willful intent to violate the statutes at issue. For this reason, we
remand with instructions that the indictment against Harris be dismissed. The same
148
CTM 8.08[2] (2008 ed.) (most case citations omitted).
- 77 -
conclusion applies to Conley, and provides an alternative basis for reversing her
conviction and remanding with instructions to dismiss the indictment.
Harris thus addresses the knowability prong of the uncertainty of law defense. But there is
still the fallback that, as a matter of fact, the uncertainty in the law can be supportive evidence that
the defendant did not have the actual intent to violate a duty known to him. The mantra I have
posited thus is conviction requires both a knowable and known legal duty.
Now, focusing on the evidentiary use of uncertainty of law on the issue of whether the
defendant knew the knowable legal duty, courts appear concerned about the potential quagmire of
tax law discussions before lay juries who may, in the courts imaginations, be more confused than
enlightened on the ultimate inquiry of the defendants willfulness. Certainly, even as to civil penalty
issues (where factual good faith is a specific defense) in trials to the court, courts are reluctant to
permit the opinions of expert as to the uncertain state of the law. Expert opinions, they reason, are
unhelpful if the purpose is to inform the court as to what the law is and making interpretive choices
as to what the law is. Interpreting the law is the function of the court, not an expert; courts are
advised as to their interpretive choices by arguments in briefs, not in expert reports or expert
testimony. But, where the expert testimony may be relevant to showing not just what the law is but
the legal environment in which a party acted in order to assess his or her level of intentionality or
willfulness, then uncertainty of the law should be provable in the trial in chief if the defendant posits
this defense.149 In criminal tax cases, good faith does negate willfulness and making legal
judgments, even bad legal judgments, in an environment of uncertainty may negate willfulness.150
Indeed, the discussion among the Justices in James assumes that the defendant could not be found
willful factually if he or she were aware of the legal uncertainty and relied upon it (in which case
there was no known legal duty); the only way the jury can be apprised of that defense is through
documents and witnesses, and the most cogent witness for a tax professional is a qualified expert
testifying that the fully qualified and ethical practitioners operate sometimes (indeed usually) in
149
Although not a criminal case, see e.g., Murfam Farms, LLC v. United States, 2008
U.S. Claims LEXIS 381 (Fed. Cl. Sept. 19, 2008) where the Court said
There is a difference between opining that a legal analysis is thorough-enough to be
reasonably relied upon and opining that the legal analysis is correct while another is
incorrect. The former opinion can be helpful to the court, while the latter is not.
The Court then denied the Governments motion to exclude the portion of the expert testimony that
did in fact relate to the factual issue for resolution.
150
Perhaps I dance on the head of a pin, but I think it is a damn important pin and the
dance steps worth attention. Technically good faith is not a defense in a criminal tax case as it may
be for the civil tax penalties. The Government must prove willfulness; the defendants good faith
is the antithesis of willfulness. At least theoretically, proof of willfulness requires negation of good
faith (i.e., the confluence of willfulness and good faith is an oxymoron). The Governments proof
of willfulness will at least should negate good faith (e.g., the virtually omnipresent lie in criminal
tax cases shows both bad faith and wilfullness (why lie if one doesnt know he or she is doing some
wrong or, in criminal tax parlance, violating a known legal duty?). See my discussion of United
States v. Aaron, 590 F.3d 405 (6th Cir. 2009) in my blog titled Willfulness and Good Faith Defense
- an Oxymoron?.
- 78 -
some context of uncertainty and the specific context before the court was, at the time of the conduct
in question, an area of uncertainty to qualified and ethical practitioners. The jury could find such
testimony helpful in assessing whether or not the defendant had acted willfully. (I caution the reader
that I dont think many courts would accept expert testimony as to the state of the law at the time
of the conduct in order to show that the defendant did or did not have the requisite intent to violate
a known legal duty.)
(8)
Psychiatric / Psychological Defenses to Willfulness.
Willfulness requires that the defendant have formulated the intent to violated the law. What
if there is some psychiatric or psychological impairment of the defendants ability to formulate that
intent? Obviously, such a defense might be powerful if presented during the investigative phase or
when, at its completion, the IRS and DOJ Tax CES are considering whether to indict. But assuming
it has not been presented or, if presented, does not stave off an indictment, can the defendant present
such evidence to a jury.
Of course, the threshold issue for such testimony is whether the person through who the
evidence is presented has the minimum required expertise and the evidence is sufficiently based in
the scientific community that it can assist the jury in determining guilt or innocence. See Daubert
v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. 579 (1993).151 This is often called the trial courts
gatekeeping role. Consider the following case in which the defendant was convicted of several
counts, among with was aiding and assisting under 7206(2). In his defense, the court had rejected
proffered psychiatric testimony that he was unable to formulate an intent to violate the law.
United States v. Cohen
510 F.3d 1114 (9th Cir. 2007)
II
A
The more troublesome issue we address concerns the district court's handling
of proffered expert psychiatric evidence on behalf of appellant Cohen in the face of
our precedent. On June 14, 2005, Cohen's lawyer filed a notice, pursuant to Federal
Rule of Criminal Procedure 12.2, that he intended to offer expert testimony by
psychiatrist Dr. Norton A. Roitman relating to Cohen's mental disease . . . bearing
on . . . the issue of guilt. Attached to that notice was a report prepared by Dr.
Roitman, who had met with Cohen on two occasions at the request of Cohen's
attorney.
In the report, Dr. Roitman diagnoses Cohen as suffering from a narcissistic
personality disorder, and concludes that Cohen did not intend to violate the law, as
would be the case with a criminal who acted out of a desire for personal gain but
151
See Michael A. Morse and Alexandra C. Gaugler, Daubert Challenges to Experts in

Federal Criminal Cases: An Overlooked Defense, 31 Champion 20 (2007).
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rather [h]is behavior is driven by a mental disorder as opposed to criminal

motivation . . . Although it is true Mr. Cohen was not delusional or psychotic and
was in possession of basic mental faculties, his will was in the service of irrational
beliefs as a result of narcissistic personality disorder. The report also notes that
Because [Cohen's] beliefs are fixed and have led him to significant adverse
consequences, he is irrational to the point of dysfunction, demonstrated by
his stubborn adherence in the face of overwhelming contradictions and
knowledge of substantial penalty. . . . Despite evidence to the contrary, his
psychological needs dominated his mentation. . . . This is the nature of the
narcissistic personality in which the sufferer could essentially pass a lie
detector test when asked commonsensical questions while giving improbable
answers.
The government moved to bar Dr. Roitman from testifying and the district
court agreed, reasoning that Dr. Roitman failed to explain how the alleged mental
disorders negate mens rea. Rather, [his] opinion[ ] merely explain[s] or justif[ies]
[Cohen's] conduct.
B
[Scope of Review omitted]
C
Federal Rules of Evidence 702 and 704(b) govern the admissibility of Dr.
Roitman's testimony, and we examine the exclusion of his testimony under both of
these rules. See, e.g., Finley, 301 F.3d at 1012-16 (examining the district court's
decision to exclude expert testimony from the defendant's psychologist under Rules
702 and 704(b)); United States v. Morales, 108 F.3d 1031, 1035 (9th Cir. 1997) (en
banc). If the evidence could have been excluded under either rule, the district court
did not abuse its discretion. Morales, 108 F.3d at 1035.
1
The threshold issue is whether Dr. Roitman's testimony would have assisted
the trier of fact within the meaning of Rule 702. According to Cohen, Dr. Roitman's
testimony would have bolstered the contention that Cohen had a good faith belief
that he was acting in accordance with the law, thereby negating the mens rea element
of 26 U.S.C. 7206(2), which requires that a defendant [w]illfully n6152 assist
152
n6 [of opinion) Willfulness requires that an act be done knowingly and intentionally,
not through ignorance, mistake or accident. Morales, 108 F.3d at 1037 (citing Ninth Circuit Manual
of Model Jury Instructions - Criminal, 5.05 (West 1995)). That is, Cohen had to know that the tax
returns he assisted in filing were false. Id.
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[*1124] in the filing of a false return. See Cheek v. United States, 498 U.S. 192,
201, 111 S. Ct. 604, 112 L. Ed. 2d 617 (1991) (holding that a defendant cannot be
convicted of violating a federal tax law if he harbors a good faith belief that he was
not violating any of the provisions of the tax laws). The government counters that Dr.
Roitman's report was irrelevant because nothing in it suggested
that defendant was not capable of forming the requisite mens rea for the
charged offenses. On the contrary, as the District Court found, Dr. Roitman's
report did no more than explain why defendant intentionally violated his
known legal duties. The report does not remotely suggest that defendant
lacked the mental aptitude to understand his legal duties or the ability to act
volitionally.
Cohen argues that United States v. Finley, 301 F.3d at 1000, controls and we
agree. There, Finley was seeking funding to open a chain of bookstores when he met
Leroy Schweitzer, a supposed investment guru who claimed to have recorded liens
against various banks which could be drawn upon by the issuance of certain
negotiable instruments. Id. at 1002-03. Schweitzer gave Finley several of these bogus
instruments, claiming that they were worth nearly seven million dollars. Id. at 1003.
Every institution presented with one of these instruments refused to honor it,
including the IRS. Id. at 1003-04. Finley persisted in attempting to pay off his tax
debt with these instruments, and he was eventually prosecuted for, inter alia, making
a false claim against the United States in violation of 18 U.S.C. 287. Id. at 1002,
1004. At trial, the district court excluded under Rule 702 testimony from Finley's
psychologist that Finley lacked the intent to defraud due to his delusional disorder
in which . . . information from the real world . . . is so grossly distorted that the
person ends up with bizarre, irrational and fixed beliefs. Id. at 1006 (internal
quotation marks omitted).
We reversed, reasoning that the excluded testimony
would have offered an explanation as to how an otherwise normal man could
believe that these financial instruments were valid and reject all evidence to
the contrary. While Finley could and did testify about how and why he
believed the instruments were valid, only a trained mental health expert could
provide a counterweight to the government's allegations against Finley.
Id. at 1013.
The facts in Finley are strikingly similar to those in the present case.
Schweitzer convinced Finley that certain financial instruments were genuine; Schiff
convinced Cohen that one could legally submit a zero return. Expert testimony
proffered by Finley and Cohen suggested they had a tendency to cling doggedly to
their beliefs even in the face of overwhelming contradictions. The Finley court
determined that the expert testimony could have helped the defendant counter the
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government's argument that he knew the financial instruments were false; similarly,
Dr. Roitman's testimony would have helped Cohen counter the government's
suggestion that Cohen knew the zero returns were false.
We disagree with the government that Dr. Roitman's report can only be read
to mean that Cohen knew what he was doing was wrong but did it anyway. In fact,
the opposite is true: a fair reading of Dr. Roitman's report suggests that once Cohen
adopted Schiff's views, Cohen would not change his mind. The report specifically
states that Cohen did not intend to violate the law. If Dr. Roitman had been
allowed to testify to that effect, his testimony would have assisted the trier of fact
within the meaning of Rule 702.
The government's reliance on United States v. Scholl, 166 F.3d 964, 970 (9th
Cir. 1999), is misplaced. There, a defendant charged with filing false tax returns
argued that the district court had erred in excluding under Rule 702 the testimony of
an expert on compulsive gambling who would have testified that pathological
gamblers, like the defendant, have distortions in thinking and 'denial,' which impact
their ability and emotional wherewithal to keep records. Id. We affirmed, noting
that there was no evidence presented at the Daubert hearing that addicted gamblers
were incapable of truthfully reporting their gambling income. Id. [E]vidence that
compulsive gamblers are in denial . . . would not tend to show that Scholl did not
believe his tax return to be correct . . . . Id. at 971.
Scholl is easily distinguishable from the present case. According to his
expert's report, a narcissistic personality disorder like Cohen's can cause a person to
continue to believe something to be true despite overwhelming evidence of its patent
absurdity. By contrast, there was no evidence in Scholl that an addiction to gambling
could cause a person to believe that a false tax return omitting winnings was true.
Neither United States v. Byers, 730 F.2d 568 (9th Cir. 1984), nor United
States v. Demma, 523 F.2d 981 (9th Cir. 1975) (en banc), require a different
conclusion. In both cases, we upheld the exclusion of psychiatric testimony offered
to negate the defendant's mens rea due to the 'wide latitude [afforded to the district
court] in admitting or excluding psychiatric evidence directed to the capacity of a
defendant to entertain a specific intent.' Byers, 730 F.2d at 571 (quoting Demma,
523 F.2d at 986). In Byers, the psychiatric testimony was ambiguous and would
not have materially assisted a jury in determining whether Byers committed a
voluntary, intentional violation of known legal duty. Id. (citations omitted). By
contrast, there is no such ambiguity in Dr. Roitman's report. The only question,
which we discuss below, is how far Dr. Roitman should have been permitted to go
in explaining his expert conclusions as they related to Cohen's ability to form the
intent to evade the tax laws.
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2
Rule 704(b) is a limitation on Rule 702. Even if expert testimony would
assist the trier of fact within the meaning of Rule 702, such testimony may be
excluded under Rule 704(b) if the testimony state[s] an opinion or inference as to
whether the defendant did or did not have the mental state or condition constituting
an element of the crime charged . . . . Fed. R. Evid. 704(b). With respect to the type
of inference precluded under Rule 704(b), the court has stated that the expert may
not draw[ ] an inference which would necessarily compel the conclusion that the
defendant lacked the requisite mens rea. Morales, 108 F.3d at 1037.
United States v. Morales, 108 F.3d at 1033, and United States v. Finley, 301
F.3d at 1016, serve as persuasive authority. In Morales, the defendant was charged
with willfully making false entries in a union ledger in violation of 29 U.S.C.
439(c). 108 F.3d at 1033. At trial, a key issue was whether her admitted
bookkeeping inaccuracies were intentional or were the result of her ignorance of
proper bookkeeping procedures. Id. at 1034. In support of her argument that the
errors were not willful, Morales proffered expert testimony from a certified public
accountant who would have testified regarding Morales's poor level of knowledge
and understanding of bookkeeping principles. Id. The district court excluded the
evidence under Rule 704(b) but we reversed, reasoning that the expert was not
going to state an opinion or draw an inference that Morales did not intend to make
false entries. Rather, she was going to state her opinion as to a predicate matter -that Morales had a weak grasp of bookkeeping principles. . . . Even if the jury
believed . . . [the expert], the jury would still have had to draw its own inference
from that predicate testimony to answer the ultimate factual question. Id. at 1037.
In Finley, we concluded that the psychologist's testimony did not violate Rule
704(b) because
The jury could have accepted the atypical belief diagnosis and still concluded
that Finley knowingly defrauded the banks. If credited, [the expert's]
testimony established only that Finley's beliefs were rigid and he would
distort or disregard information that ran counter to those beliefs. [The expert]
did not, and would not be allowed to, testify about Finley's specific beliefs
with regard to the [bogus] financial instruments. The jury was free to
conclude that Finley knew the notes were fraudulent, despite the rigidity of
his belief system.
301 F.3d at 1015-16.
We have little doubt that if Dr. Roitman had been permitted to testify as to
all of the conclusions contained in his report, some of that proffered testimony as
contained in his report would have invaded the province of the jury and violated Rule
704(b). However, the best way for the district court to have insured the exclusion of
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the potentially inadmissible aspects of Dr. Roitman's testimony was not to bar him
from testifying altogether, but to sustain the government's objections to particular
questions likely to elicit inadmissible evidence under the rule. The district court also
could have discussed with the parties before he testified the limits that would be
imposed on the scope of Dr. Roitman's testimony. See Finley, 301 F.3d at 1005.
If the district court had followed that course of action, then Dr. Roitman's
testimony, like the expert testimony at issue in Morales and Finley, would have gone
to a predicate matter -- whether Cohen suffered from a Narcissistic Personality
Disorder. Even if the jury had accepted this diagnosis, the jury would still have been
required to determine what impact, if any, that condition might have on Cohen's
ability to form the requisite mens rea -- the intent to evade the tax laws. As in Finley,
the jury could have accepted the Roitman diagnosis but determined nonetheless that
Cohen knew the zero returns were false.
The government relies on United States v. Campos, 217 F.3d at 710-12, in
which we affirmed a decision to exclude testimony by the defendant's expert
polygraph examiner that the defendant did not know that she was transporting
marijuana into the United States. Such testimony, according to the Campos court,
falls squarely within the scope of Rule 704(b) because, if the testimony was
credited, it necessarily follows that the defendant lacked the requisite mens rea. Id.
at 711.
Campos is easily distinguishable. If Dr. Roitman's testimony was limited in
the manner described above, the jury could still have concluded that Cohen knew the
zero returns were false but chose nevertheless to assist others in filing them. But in
Campos, if the jury believed the polygraph expert, the conclusion that the defendant
lacked the requisite mens rea was inescapable.
3
The government argues that even if Dr. Roitman's testimony was admissible
under Rules 702 and 704(b), it should have been excluded under Rule 403. n7153 We
disagree. Dr. Roitman's testimony would have been highly probative on the issue of
whether Cohen could have formed the requisite mens rea, and was unlikely to cause
significant confusion with the jury if properly constrained by compliance with the
rules of evidence.
153
n7 [of opinion] Federal Rule of Evidence 403 provides that relevant evidence may
be excluded if its probative value is substantially outweighed by the danger of unfair prejudice,
confusion of the issues, or misleading the jury . . . .
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4
Under our test for nonconstitutional error, which we apply to errors as to the
admissibility of expert testimony, we must reverse unless it is more probable than not
that the error did not materially affect the verdict. United States v. Rahm, 993 F.2d
1405, 1415 (9th Cir. 1993) (citation omitted).
The court in Finley concluded that the exclusion of the expert's testimony was
not harmless because that testimony was essential to the defense. 301 F.3d at 1018.
Finley's counsel did not have any other way of explaining the possibility that Finley
suffered from a mental disorder. Id.; see also Morales, 108 F.3d at 1040 (holding
that the wrongful exclusion of the defendant's expert witness who would have
offered evidence that the defendant lacked the requisite mens rea was not harmless
error); Rahm, 993 F.2d at 1415 (concluding that the wrongful exclusion of the
defendant's expert witness, a psychologist who would have testified that the
defendant suffered from perceptual difficulties and was therefore less likely to
know that the currency in question was counterfeit, was not harmless error).
Likewise, the exclusion of Dr. Roitman's testimony left Cohen without any way to
explain the effect that his mental disorder may have had on his ability to form the
requisite mens rea. We therefore reverse Cohen's conviction, vacate his sentence, and
remand for a new trial.
(9)
Amended Returns.
If the taxpayer files an amended return or returns after the IRS becomes aware of potential
problems with the original return(s), does the filing of amended returns negate willfulness with
respect to the original return(s)? State otherwise, can the taxpayer still be convicted for the original
fraudulent returns? Consider the following case rejecting a taxpayers argument that the district
court erred in excluding evidence of filing amended returns:
We review a district courts exclusion of evidence for abuse of discretion.
The district court has considerable discretion in admitting evidence of acts of
subsequent conduct of a defendant offered to prove the absence of evil intent. An
ever-present reason demanding latitude for [a courts] ruling on admissibility is that
what takes place, particularly after the fact, is often feigned and artificial. Whether
evidence of a defendants subsequent mental state, as demonstrated by a subsequent
act, is of any probative value in establishing his state of mind at the time of the
alleged criminal acts must be determined by the circumstances of the individual case.
Donohoe urges us to follow the First, Second, and Seventh Circuits, which,
he asserts, have allowed the introduction of amended tax returns to show good
faith. He points to three illustrative cases: United States v. Johnson, 893 F.2d 451,
454 (1st Cir. 1990); United States v. Dyer, 922 F.2d 105, 108 (2d Cir. 1990); and
United States v. Tishberg, 854 F.2d 1070, 1073 (7th Cir. 1988). None of the cases
cited by Donohoe holds that amended tax returns tend to prove a taxpayers lack of
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criminal intent when filing an original return. In Tishberg, for example, the
admissibility of the amended return was not considered on appeal the court stated
during a discussion of the sufficiency of the evidence that the defendants amended
return may demonstrate a good faith effort to correct his previous mistakes.
Tishberg, 854 F.2d at 1073. The court went on to say that the return does not,
however, negate the import of his previous action. Id. The suggestion that an
amended return may demonstrate good faith in Tishberg does not control Donohoes
situation because the good faith referred to in Tishberg is a good faith effort to
correct . . . previous mistakes, id., not, as was in question in Donohoes trial, good
faith at the time the original return was filed. Donohoes reliance on Dyer and
Johnson is similarly unavailing.
Whether an amended tax return filed post-indictment technically might be
relevant to the taxpayers intent at the time he filed the original return, there is no
doubt that self-serving exculpatory acts performed substantially after a defendants
wrongdoing is discovered are of minimal probative value as to his state of mind at
the time of the alleged crime. The district court excluded this evidence because it
was [of] no probative value, and at best . . . confus[ing to] the jury. (T. Tr. at
1227). Federal Rule of Evidence 403 provides that evidence, though relevant, may
be excluded if its probative value is substantially outweighed by the danger of . . .
confusion of the issues, or misleading the jury. Given that there was little, if any,
probative value in Donohoes amended filing, see United States v. Ross, 626 F.2d
77, 81 (9th Cir. 1980) (holding that the defendants filing of subsequent accurate tax
returns and his offer to pay any delinquent taxes were not relevant to the charge that
he had willfully failed to file tax returns in previous years), the district court did not
abuse its discretion in ruling that any minimal probative value was substantially
outweighed by danger of confusing the issues and misleading the jury.154
Under this analysis, the filing of amended returns before the IRS begins investigation or
events have occurred that will lead to the IRS investigating is relevant and of more probative value
as to the taxpayers good faith and lack of willfulness when the original returns were filed. More
importantly, the filing of amended returns before those events will qualify the taxpayer for the
voluntary disclosure policy which will take away the risk of criminal prosecution. I discuss the
voluntary disclosure policy in detail below,155 but suffice it to say that it is based upon tax
administration imperatives beyond the fact that the filing of the amended return(s) before those
events would be a strong defense in a criminal prosecution with respect to the original return(s).
So, turning back to the situation of whether a taxpayer should file after the IRS has started
its investigation or events are in motion that will cause the IRS to investigate, the question is
whether the taxpayer should file amended return(s). Although they will not qualify the taxpayer for
the voluntary disclosure policy, the amended returns might help at the margins. I have had at least
154
United States v. Radtke, et al., 415 F.3d 826, 840-841 (8th Cir. 2005) (In the
quotation, some citations and internal quotes are omitted for readability.)
155
See discussion beginning on p. 552.
- 86 -
one situation where I think the fact of filing after the investigation started was material to the
exercise of prosecutorial discretion not to indict. Moreover, should there be an indictment, the
defendant may be able to get before the jury a defense that, once he learned there was a problem,
he corrected it promptly. A jury might like that.
The taxpayer and practitioner must be aware that one of the problems with filing amended
returns is that the amended return(s) constitute admission(s) as to tax due and owing, thus
establishing that element of the crime of tax evasion. In other types of prosecutions, the filing of
amended return(s) may prove elements that the Government must otherwise prove. For example,
in a tax perjury prosecution establishing that the original returns were materially false. Moreover,
in tax crimes prosecutions, a jury may not be willing to convict unless it thinks a significant amount
of tax is due, and if the amended returns are entered in evidence as a defense strategy, that fact will
be established by the taxpayers own admission. Of course, tax crimes require willfulness, and the
filing of the amended returns will not prove willfulness as to the errors with respect to the original
return(s). The Government still must meet that burden. So the question the practitioner must
consider is whether it will be beneficial for the taxpayer to file amended returns after the critical
events have been set in motion. Assuming, as is the case in many criminal investigations and
prosecutions, the Government can clearly meet the burden of proof with respect to the other
elements (particularly, in a tax evasion case, a material tax due and owing), it may be worth a shot.
Even though, as the Court reasoned in the Radtke quote above, the filing of amended return(s) may
be suspect and the prosecutor will certainly call that to the attention of the jury, still there may be
some marginal benefit to the taxpayer (which is, of course, why the Government strived do mightily
to have that evidence excluded in Radtke). Keep in mind that Radtke does seem to suggest that the
filing of amended returns is relevant; although questionable when filed late in the game, it is still
relevant. In other cases, the trial court may make the discretionary call as to the balance of relevance
and confusion of the jury differently. So, the filing of amended return(s) may not really hurt and
might help.
d.
Proving Willfulness.
Willfulness is a state of mind. There are no witnesses and only in a rare case would a
defendant admit the required state of mind. State of mind is thus usually provable only through
circumstantial evidence -- proof of acts from which the state of mind can be inferred. Consider the
following:
------------------------------United States v. Ytem, 255 F.3d 394 (7th Cir. 2001)
POSNER, CIRCUIT JUDGE.
The defendant, an accountant who worked in Illinois, embezzled funds of his
employer by writing, without authorization, three checks to himself aggregating
more than $135,000 during a two-month period and depositing them in his personal
account in a Maryland bank that happens to have offices only in that state and in
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Virginia. The locations of his place of work and of his bank are relevant because he
was charged not only with willful failure to report his embezzled income on his
federal income tax return for the year in which he received that income, 26 U.S.C.
sec. 7206(1), but also with having transported money obtained by fraud across state
lines. 18 U.S.C. sec. 2314. He was convicted of both crimes, was sentenced to a
total of 27 months in prison, and appeals, challenging only the sufficiency of the
evidence to convict him.
The appeal bespeaks a deep or perhaps desperate misunderstanding of the law
of evidence, especially with regard to the second charge. It is conceded that all the
government had to show was that the defendant had caused the checks to be
transported across state lines. It is also conceded that the checks indeed ended up in
either a Maryland or a Virginia office of the bank in which they were deposited and
that one of the checks was accompanied by a note to the bank in the defendant's
handwriting telling the bank what to do with the check. Presumably the defendant
mailed the checks (and the accompanying note) to the bank but there is no direct
evidence of this; that is, no one testified to having seen the defendant mail these
items and he does not admit having mailed them. He argues that therefore he cannot
be proved guilty beyond a reasonable doubt of having caused them to be transported
across state lines.
He admits that certainty is not required to establish guilt beyond a reasonable
doubt, that a conviction based on fingerprint evidence for example cannot be
overturned by pointing out that there is some minute probability of erroneous
fingerprint identification. But he insists that a conviction can survive remote doubts
about its correctness only when it is based on computed probabilities; common sense
probabilities will not do. That is wrong. Common sense as well as science is a
source of justified true beliefs, including warranted confidence that certain
probabilities though unquantified are so slight that they do not create reasonable
doubt. Often this confidence is formed by comparing hypotheses and sensibly
adjudging one to be vastly more probable than the others, even taken all together.
This case illustrates that routine and unexceptionable reasoning process nicely.
While it is conceivable that the defendant did not cause the checks to end up in
Maryland or Virginia -- maybe after writing them and the accompanying note he
changed his mind and threw them in the wastepaper basket in his office and the
cleaning people picked them up after hours and mailed them to the defendant's bank
-- this hypothesis is so unlikely to be true that in the absence of any evidence in
support of it (and there is none) a rational jury would be entirely justified in
dismissing the probability of its being true as minute in relation to the probability
that the defendant himself caused the checks to end up where they did; indeed a jury
would be irrational to conclude otherwise.
The situation is a little more doubtful with respect to the defendant's
conviction for willfully filing a false return. To be convicted of that offense he had
to be proved to have known (at least if he made an issue of his knowledge) that
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illegal income is taxable and so his income from embezzlement should have been
reported, 26 U.S.C. sec. 7206(1); Cheek v. United States, 498 U.S. 192, 201-02
(1991); [other citations omitted], since otherwise the return though false would not
be willfully so; and again there is no direct evidence that he knew -- evidence that
could only have taken the form of an admission by him, for that is the only form that
direct evidence of a person's state of mind can take. (There are no eyewitnesses to
the mental contents of a person's head, as opposed to external phenomena, such as
the placing of a letter in a mailbox.) But the circumstantial evidence was convincing,
and the absence of direct evidence therefore no bar to conviction. We are, however,
doubtful about the validity of the government's argument that the defendants efforts
(which incidentally were rather feeble) to conceal the embezzlement was evidence
that he knew that embezzled income is taxable. For he would have had an incentive
to conceal the embezzlement in order to save his job and avoid prosecution for
embezzlement, even if embezzled income were tax-free. But there is plenty of other
circumstantial evidence of the defendant's intent to avoid tax. The defendant was an
accountant, moreover an experienced one; he personally prepared the fraudulent tax
return; the sums taken were large (they amounted to 75 percent of his total income
during the period of the embezzlement), and (the weakest bit of evidence) he used
the money for ordinary expenses, the sort of thing people usually defray from taxable
income. Furthermore, the fact that illegal income is taxable is widely known, even
among lay people. Everyone knows that Al Capone, for example, was nailed for
income-tax evasion, not for the bootlegging, loan-sharking, extortion, and
prostitution that generated the income. Accountants know better than anyone except
tax lawyers that illegal income is taxable.
It is possible nevertheless that this experienced accountant who prepared his
own tax return thought that illegal income was tax exempt, but it is too remote a
possibility to compel an acquittal, at least in the absence of any evidence that might
make it plausible, such as that the defendant suffered from some psychiatric disorder
that had deranged his knowledge of elementary tax law or his ability to use that
knowledge in filling out his income tax return. Anything is possible; there are no
metaphysical certainties accessible to human reason; but a merely metaphysical
doubt (for example, doubt whether the external world is real, rather than being
merely a dream) is not a reasonable doubt for purposes of the criminal law. If it
were, no one could be convicted. As with the transportation of the checks, so with
the charge of willfully filing a false return, the jury had to choose between two
hypotheses. One was that the defendant knew that embezzled income is taxable.
The other was that he thought embezzled income tax-free -- a token of the
government's affection for embezzlers and other thieves. The former hypothesis was,
in the circumstances, far more likely than the latter. That is enough to compel
affirmance. There is no suggestion that the jury was improperly instructed or that it
might have been misled by any error committed at the trial.
Affirmed.
- 89 -
---------[END OF YTEM CASE]------------For example, in a criminal prosecution for failing to file for years 11-13, the Government
must prove that the defendant knew of the duty to file and failed to file for years 11-13. The failure
to file is the objective act, but it does not show, of itself, that the failure to file was willful (or in the
Cheek language, an intentional violation of a known legal duty). But, the Government might show
that the taxpayer had filed returns for the years 1-10 immediately preceding the failure to file years.
Certainly, a jury can infer from that pattern of filing that the defendant knew of the legal obligation
to file and, despite that knowledge, chose not to file. In the cases that the Government brings, there
will always be other facts from which the inference of willfulness can be made, but that its how it
is done.
For discussion of one circumstantial method of proving a key element of the Governments
case through so-called 404(b) evidence (see discussion beginning on p. 734 below.)
e.
Tax Due and Owing.

(1)
No Tax, No Tax Evasion.
Where there is no tax due and owing, there is no tax evasion.156 One of the first lines of
defense to explore is whether the taxpayer really owes the tax the Government alleges as an essential
element of its tax evasion count. Often the focus of this inquiry is to reduce the tax due by
deductions or credits which the taxpayer either failed to claim on the return or, if claimed, claimed
too small and amount. The Supreme Court recognized this opportunity in Sansone v. United States,
380 U.S. 343, 352-3 (1965).157 In her now infamous criminal trial, Leona Helmsley (only little
people pay taxes) asserted this defense by claiming that her husband's real estate empire generated
far more depreciation deductions than they had claimed on their returns that so offended the
156
Boulware v. United States, 552 U.S. 421, 432 (2008) (There is no criminal tax
evasion without a tax deficiency . . .). In this context, the term deficiency means only that the
taxpayer filed his return and failed to remit all that tax that he or she owed (whether or not he or she
reported the tax). Arguments have been made that this defense is not necessarily commanded by
the statute, although consistent interpretation over the years makes it a solid defense. See Robert
H. Jensen, Reflections on United States v. Leona Helmsley: Should Impossibility Be a Defense
to Attempted Income Tax Evasion, 12 Va. Tax Rev. 335 (1993). The author is principally concerned
about the person with evil motive who misreports some item but is then saved by some offsetting
but unknown other item in his or her favor. That ground is substantially covered by 7206(1), the
tax perjury statute that we cover below, so the problem posited by the author may not be as
important as he thinks.
157
In applying the lesser included offense analysis, the Sansone court explained the tax
evasion had a key separate element that 7207, a lesser offense, did not have tax due and owing
and reasoned that the taxpayer would be entitled to a lesser included offense instruction if if the
jury believed that an understatement of deductible expenses had offset the understatement of gross
receipts, (p. 353), which would mean that the taxpayer could not be convicted of the evasion
offense but could be convicted of the lesser included 7207 offense.
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Government.158 Indeed, she urged, the unclaimed deductions were more than sufficient to eliminate
this element despite omission of large sums of income. It did not work for her, but it is an avenue
that the experienced practitioner will explore.159
In undertaking this defense, practitioners should be aware that some expansive Government
rhetoric might suggest that a defendant cannot use unclaimed deductions or credits to reduce or
eliminate the tax due and owing element for tax evasion.160 The central basis for that claim is a
noncontextual reading of the Second Circuits decision in Helmsley. There, in filing the returns, the
defendant used a method of accounting that deferred depreciation deductions into later years that,
under a different method, might have permitted them to be claimed in the years of prosecution. In
order to avoid the effect of the Governments claims of unreported income and unrelated deductions,
the defendant sought to use a different, more accelerated method of accounting that might defeat the
element of tax due and owing. The Second Circuit noted that the held that the doctrine of election
would prevent the change and, in any event, the Commissioners consent, which was neither sought
nor granted, would be required to change the method of accounting. The Second Circuit did
articulate a concern that permitting the change of depreciation method would allow ex post facto
opportunity to avoid a tax evasion charge:
The law could hardly be otherwise. If it were, evaders with complicated returns
would be allowed to evade taxes on one portion of their return while using a
depreciation period that would be the most profitable in the long run if the evasion
went undetected. If the evasion were uncovered, then they would need only to
recalculate under a shorter depreciation period that would increase deductions for the
years in which evasion is charged.161
158
United States v. Helmsley, 941 F.2d 71 (1991), cert denied, 502 U.S. 1091 (1991).
See United States v. Bishop, 264 F.3d 535, 550 (5th Cir. 2001), where the Court said
(citations omitted for readability):
The government must demonstrate the existence of a deficiency beyond a reasonable
doubt, but need not prove the extent of the deficiency with mathematical certainty.
There is no deficiency in the absence of a showing that the government is actually
due a tax in excess of that reported. Therefore, undeclared deductions, credits, losses
carried over from prior years, and so on, should be considered when calculating the
deficiency.
See also United States v. Kayser, 488 F.3d 1070, (9th Cir. 2007) (error to refuse a jury instruction,
properly grounded in evidence, that unclaimed deductions can eliminate any claimed tax due arising
from fraudulent omissions of income, but noting that the burden to prove such deductions is on the
defendant).
160
See particularly the decision in United States v. Tilga, 824 F. Supp. 2d 1295 (D. NM
2011) addressing whether an unclaimed foreign tax credit could be used to reduce the tax loss at
sentencing. I address Tilga below, but just note here that the issue should be the same for the tax
due and owing for evasion as it is for sentencing.
161
United States v. Helmsley, supra, pp. 86-87.
159
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Notice that the Second Circuit limited the concern to the change of accounting method. Under the
method of accounting adopted with the original return, there were no unclaimed depreciation
deductions. I dont think that Helmsley is properly read to mean that the defendant cannot assert
unclaimed proper deductions to rebut the Governments proof of a tax due and owing. And, of
course, the defense was recognized in Sansone, so I think it is alive and well, the Government
rhetoric notwithstanding.162
The tax attorney will typically hire a seasoned tax accountant to recalculate the tax liability
to see if indeed the taxpayer owes no taxes or the amount of taxes owed are not material. (I discuss
materiality below, but here I want you to see that, depending upon the facts, it may be possible to
rebut the charge on the basis that no tax is due.)
This defense is often intertwined with the issue noted above that the Government cannot
bring a tax charge where the underlying legal duty is not certain and is thus, as a matter of law, not
a known legal duty. Often, the taxpayer will have taken aggressive reporting positions on several
or even many items on the return. The accountant will first exclude from his or her calculations any
items as to which there is a James-type uncertainty defense. The Government should have excluded
all such items in its calculations upon which the charge is based, but it may not have done so and
you may be able to make arguments such as the taxpayer's lawyers did in James and in Garber that
the legal duty is uncertain. Moreover, the taxpayer may assert that he or she was entitled to
additional tax benefits which he or she did not claim.
Lets look at one case where this defense was asserted. In United States v. Cruz,163 the
taxpayer, a Dominican citizen who was a U.S. resident, was subject to tax in the Dominican
Republic and in the United States. The taxpayer had not filed a Dominican return for years. He did
file U.S. returns. The Government charge under 7201 that he had not reported all of his income.
The taxpayer urged that, even if he did have the additional income the Government alleged, he still
was not subject to U.S. tax because he would be entitled to a foreign tax credit under 901 of the
Code. Section 905(a) allows the U.S. taxpayer to elect to claim the FTC when (1) accrued or (2)
paid. The election can be made within 10 years. At or shortly before the trial, the taxpayer elected
to accrue the tax for the FTC. The taxpayer then urged that, based on the Dominican taxes that he
accrued for the year, he was entitled to a credit that would wipe out his U.S. tax. With no U.S. tax
liability, of course, he could not be charged with violating 7201. The taxpayer urged that it was
not relevant to his liability for that year that he ultimately did not ever pay the Dominican tax. The
Code's fix for a taxpayer who claims the FTC by accruing a foreign tax but then does not ultimately
pay the foreign tax within a 10 year window is to retroactively increase the tax for the year.
162
In United States v. Kayser, 488 F.3d 1070 (9th Cir. 2007), the Court rejected the
Governments argument that the defendant could assert unclaimed deductions, but, although the case
could be read as requiring the defendant to prove the expenses, I think it is more properly read as
that the defendant must meet a burden of production to put the issue in play and thereafter, when
submitted to the jury, the jury should be instructed that the Government must disprove their
existence, for otherwise the Government will not have established the element of the crime.
163
698 F.2d 1148 (11th Cir. 1983), cert. denied, 464 U.S. 960 (1983).
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However, that 10 year time period lapses only after the criminal statute of limitations (6 years) has
expired. The Court held that the taxpayer could nevertheless be prosecuted, reasoning:
In construing the requirements of section 905, we will not be constrained by
intricate technicalities which would create a haven for federal tax evasion. When
interpreting statutes, we are required to give a practical interpretation which will not
produce an absurd result. If we accept Cruz's interpretation of section 905, an
accused taxpayer will always avoid successful prosecution. For example, under
Cruz's interpretation, a taxpayer in his position could wait and pay no tax, either to
the United States or the Dominican Republic until the United States authorities
became aware of an irregularity in his tax return. Once discovered, he could either
pay or immediately admit the foreign tax and claim the retroactive United States tax
credit under section 6511(d)(3), as an absolute defense. Thus, he could fix the
amount of the foreign tax liability which would automatically entitle him to the
foreign tax credit. If the fraudulent omission is overlooked, both the United States
and the Dominican Republic are cheated of taxes. In short, the taxpayer is able to
gamble that neither government will become aware of his tax liability. Additionally,
if the United States waits for the ten years allowed by statute for the taxpayer to fix
the amount of the foreign tax liability, then the six-year statute of limitations on the
section 7201 prosecution lapses. Against this background, we must approach this
case from a practical viewpoint.
The determination of criminal liability is the real issue at stake, not merely
the question of Cruz's right, as in a civil case, to a foreign tax credit. Since this is a
criminal matter, the government need only establish that Cruz received unreported
income, and that his nondisclosure resulted in a tax deficiency. The record reveals
that the government provided these elements. At this point, Cruz had the burden of
negating the deficiency by showing that it was either wrongly computed, cancelled
by another deduction or, in this instance, a credit not yet allowed. Cruz sought to
prove that the deficiency was negated by showing a credit not yet allowed.
Cruz presented, primarily by expert testimony, four items of evidence as
proof of his right to a foreign tax credit: (1) that he was a resident of the Dominican
Republic, (2) that he had determined his Dominican tax liability, (3) that the
Dominican Republic's statute of limitations had not expired for the collection of
taxes, and (4) that his Dominican Republic tax liability for the respective years were
final. No proof, however, was offered which indicated that Cruz fixed the amount of
his foreign tax liability prior to trial. Only after the discovery of the deficiency and
trial did Cruz fix the amount of his foreign tax liability. His after trial payment of the
foreign tax liability cannot be used on appeal to overturn the conviction. In this
respect, the jury instruction given by the district court was correct. The instruction
required that there be a firmly established taxable amount owed the foreign
government and determined by it before the taxpayer would be entitled to a foreign
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tax credit. The practical effect of this decision means the tax evader can no longer
play one government against the other to defeat an evasion prosecution.164
I cite Cruz to emphasize the importance for the defense counsel in a criminal tax case to be
sure that he or she brings to the task an understanding of the intricacies of the tax law. That may be
done by engaging the appropriate experts.165 Indeed, one of the first orders of business in a tax
evasion representation is to marshal the resources to determine if the taxpayer has this type of
defense. In an appropriate case, it can make the difference. It did not in Cruz, but I think that a
good argument can be made that the court of appeals wrongly decided the case. We have seen above
that the Government cannot prosecute where there is doubt as to the tax liability. Where the Code
clearly and unequivocally gives the taxpayer the right to claim the credit, even ex post facto, by
accrual rather than payment, it cannot be said that there is no doubt as to the tax liability. It is true,
as the court noted, this would mean that it would be difficult to bring a tax evasion prosecution
against a person who is subject to a foreign tax that will substantially wipe out his U.S. tax liability,
but if there is to be a fix for the criminal warp, Congress should legislate the fix rather than have the
courts simply ignore the glitch in a criminal case.
This foreign tax credit issue has not surfaced again since Cruz in the context of eliminating
the tax due and owing element for the crime of evasion, but it has arisen in the context of
determining the tax loss for purposes of sentencing. I deal with sentencing later in this text, but
suffice it to say that, the tax loss arising from the taxpayers fraudulent conduct that is the subject
of a tax crime is the principal element in for tax crimes sentencing under the now advisory
Sentencing Guidelines. The greater the tax loss, the greater the advisory sentencing range. So, the
issue is whether a defendant can accrue the foreign tax credit to reduce the tax loss. The same legal
construct is available the law permits the accrual of the foreign tax credit, even retroactively, to
reduce the tax liability for the year of accrual. In United States v. Tilga, 824 F. Supp. 2d 1295 (D.
N.M. 2011), the Court held that the foreign tax credit could be accrued to reduce the tax loss for
sentencing. On April 9, 2009, Tilga and a codefendant166 were indicted for conspiracy (one count)
and tax evasion (6 counts) for the tax years 1999 through 2004. In August 2009, Tilga filed
Canadian returns for those years but did not pay the foreign tax indicated on the return (or any
interest or penalties that may have been due). Tilga apparently did that to try to set up a Cruz-type
defense to the underlying tax due and owing element for evasion; and she made that claim in postindictment negotiations with the prosecutors. I infer that the plea negotiations included considerable
angst over the foreign tax credit issue. Tilga pled to the conspiracy count, and the prosecutors
dropped the remaining charges.167 In the plea agreement, the prosecutors and Tilga stipulated to a
164
Pp. 1151-1152.
Indeed, failure to engage the appropriate tax expertise to insure effective
representation as to the intricacies of tax law can be malpractice. See e.g., Baxter v. United States,
634 F.Supp. 897 (E.D. Ill. 2009) (failure to engage tax expertise as to the tax loss number for
sentencing is ineffective representation of counsel).
166
The co-defendant had parallel relevant facts to this discussion, but I focus in the text
only on Tilga and otherwise do not develop those parallel facts for the co-defendant.
167
It is not clear whether Tilgas Cruz-type claims was a key dynamic in the
Governments willingness to accept a single count conspiracy count, but my experience is that the
165
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tax loss of $23,200 that was net of the foreign tax credit. (Hence the inference I made earlier.) The
stipulation explained that that the prosecutors would not contest the foreign tax credit for
determining the tax loss.168 (Another basis for the inference.) In filing the PSR, a report to the
sentencing judge as to the sentencing factors, however, the Probation Officer recommended to the
sentencing judge a tax loss of $1,973,272 which did not allow the benefit of the foreign tax credit.
Suffice it to say for present purpose that dramatic increase in the tax loss would have indicated a far
greater sentence under the advisory Guidelines. The Court allowed the foreign tax credit, based on
(i) questioning and distinguishing Cruz and (ii) a recent Tenth Circuit case169 that allowed related
deductions in computing the tax loss. Basically, the Court concluded that the foreign tax credit as
enacted by Congress was allowable because of the way Congress enacted the credit to permit an
accrual of the credit. This short summary of the Tilga case is necessarily incomplete for such an
excellent opinion, so I strongly recommend reading the full opinion.
The point is that, although Tilga arose in a sentencing context, it points out the fallacies
inherent in Cruz which dealt with the key tax due and owing element of the crime of tax evasion.
I think that we will see the specific Cruz-type issue presented again in the future, and with skilled
counsel such as available in Tilga, perhaps Cruz will be overruled, distinguished or questioned. The
point still is that special tax expertise must be available to be deployed in tax crimes cases. That
may sound obvious, but often is not to general federal criminal practitioners.
The tax for purposes of 7201 does not include penalties or interest.170
(2)
Substantiality and Materiality.
If the statute were read literally, a taxpayer evading $1 of tax could be convicted. It is
doubtful that a jury would convict on that proof, however. Some courts add a nonstatutory spin on
the tax due element by requiring that the tax due be substantial.171 You will recall that in the Fifth
Circuits tax evasion jury instruction quoted above, there is a substantiality requirement. As in all
of life, most authorities engraft a materiality or substantiality requirement, in this case by stating that
the tax due must be substantial.
Government would have done that anyway, under DOJ Taxs major count practice.
168
I strongly recommend to readers going to the opinion to focus on the stipulation and
the Governments reasons for wanting to stipulate, which suggests considerable concern over Cruz
but an unwillingness to abandon it completely.
169
United States v. Hoskins, 654 F.3d 1086 (10th Cir. 2011), which I discuss later in the
text beginning at p. 308.
170
See United States v. Wright, 211 F.3d 233 (5th Cir. 2000) (noting that the Sentencing
Guidelines also do not consider penalties and interest for evasion of assessment).
171
See United States v. Helmsley, 941 F.2d 71, 83-84 (1991), cert denied, 502 U.S. 1091
(1991) (We have also required a showing that the deficiency was substantial.). See also cases
discussed in United States v. Daniels, 387 F.3d 636 (7th Cir. 2004), cert. denied, 544 U.S. 911
(2005), discussed in the text below.
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DOJ Tax's CTM adds this substantiality spin on the tax due element, even though noting that
two Circuits have rejected any requirement of substantiality.172 In United States v. Daniels,173 the
Court stated that the statute defining the crime did not contain a substantiality requirement and held
the government need not charge a substantial tax deficiency to indict or convict under 26 U.S.C.
7201. The Courts reasons for not adding that spin were succinctly stated:
To hold otherwise would contradict the clear language of the statute and lead to an
absurd result. Requiring the government to charge and prove that a defendant's tax
deficiency is substantial in order to prosecute her for tax evasion would prevent the
prosecution and punishment of those who willfully cheat the government out of
small or insubstantial amounts of money. A substantiality element would invite
taxpayers to cheat on their taxes in small amounts without fear of prosecution. We
cannot countenance such a result. Although evidence of a large or substantial tax
deficiency may aid the government in proving willfulness, it is not itself an element
of the offense. 174
Another circuit recently reached the same conclusion, but suggested in dicta that where an
imprecise method of proof is used such as the net worth method which the Supreme Court is
fraught with danger courts should charge the jury that a substantial tax is required.175
However, this debate is ultimately resolved in an academic sense, there can be no question
that in the exercise of prosecutorial discretion a discretion also influenced by what juries will
actually do in a case where the tax evaded is insubstantial a tax prosecution will not be brought
where the tax evaded is not substantial in some sense we (and a jury) can recognize. Even in
Daniels,176 the court noted:
Defendants do not propose an amount at which a tax deficiency becomes
substantial, or how we could set a threshold. In any event, defendants did not
contest substantiality at trial, and at sentencing they conceded a tax loss of over
$69,000. Certainly, this amount is substantial under any rubric. 177
172
See DOJ CTM 8.07[3] (2008 ed.) (It is enough to prove that a defendant attempted
to evade a substantial income tax, even though the actual amount of tax that he or she owes may be
greater than the amount charged in the criminal case.); the cases the Government cites that hold
substantiality is not required are United States v. Daniels, 387 F.3d 636, 639 (7th Cir. 2004); United
States v. Marashi, 913 F.2d 724, 735 (9th Cir. 1990).
173
387 F.3d 636 (7th Cir. 2004).
174
For a similar holding, see United States v. Marashi, 913 F.2d 724, 735 (9th Cir.
1990), recently cited by a Ninth Circuit panel as precedent on this point in United States v. Taylor,
2005 U.S. App. LEXIS 2458 (2/7/05) (unpublished opinion).
175
United States v. Heath, 525 F.3d 451 (6th Cir. 2008).
176
United States v. Daniels, 387 F.3d 636 (7th Cir. 2004)cert. denied, 544 U.S. 911
(2005).
177
Id., n. 3 of the opinion.
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I include below some IRS guidance on substantiality in this context. (See LGM CT-1 beginning at
p. 155).
In sum, the Circuits are divided on the presence or absence of a substantiality requirement,
as the Supreme Court recently noted in Boulware v. United States, 552 U.S. 421, 424 n2 (2008)
(citing the Daniels case).
(3)
Criminal Tax Numbers.
The tax due that the Government will use to support its tax evasion prosecution is not
necessarily the tax due for civil tax purposes.178 To illustrate, assume that, for civil tax purposes,
the taxpayer had $100,000 income that he or she failed to report. Assume that the tax liability on
that omitted income is $35,000. The $100,000 omitted income consists of two items -- $50,000 of
embezzlement income which the taxpayer clearly knew was taxable and chose not to report and
$50,000 of personal injury income which the Government is satisfied that the taxpayer thought or
could have reasonably thought was excludable under 104 but which for technical reasons is not
properly excludable under that section. In calculating the tax due for tax evasion purposes, the
Government will compute the tax only on the $50,000 of embezzlement income and will not include
the $50,000 of personal injury income. The resulting tax is referred to as the criminal numbers
and it is important to get a clear fix on these numbers. Obviously, if defense counsel can get the
criminal numbers down sufficiently, the Government may perceive some difficulty in trying to make
a tax evasion case and may give up the prosecution.
There are thus the civil tax numbers and the criminal tax numbers. The civil tax numbers
are never less than the criminal tax numbers and usually more because of the phenomenon I just
mentioned -- i.e., some components entering the tax calculation may not be items which could
support a tax evasion prosecution. There are still other numbers that you should be aware of. These
are the tax loss numbers which are used in the Sentencing Guidelines to determine the guideline
sentencing range that will apply if the taxpayer is found guilty. The Sentencing Guideline tax loss
numbers are conceptually the same as the criminal numbers because they represent the tax loss
attributable to the taxpayers fraud. But there are some nuances in the concept that we will deal with
in discussing the Sentencing Guidelines.
(4)
Corporate Diversions.
A common fact pattern with closely held C Corporations is for the shareholder(s) to take
money out of the corporation in a way that underreports the corporations tax liability and
underreports the shareholder(s) tax liability. There are many ways of implementing this type of
double underreporting, but a common pattern is for the shareholder of a corporation that has a lot
of cash coming through its business (e.g., a restaurant business) to pocket some of the cash each
evening, thus preventing it from being shown on the books from which the corporation and the
178
See ILM 200734020, reprinted at 2007 TNT 166-12 (also explaining the process of
completing the criminal investigation and prosecution first before continuing and completing the
civil audit process.
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shareholder calculate their tax liabilities. As to the shareholder(s), the income that results from such
a diversion is dividend income. Dividends are taxable to the shareholder receiving the dividends,
but in the tax law the concept of dividend is a term of art. It is not just a distribution from the
corporation to the shareholder but is a distribution from the earnings and profits of the corporation.179
The Code does not define earnings and profits, and the calculation earnings and profits may be dicey
indeed.180
Theres the rub. The conventional wisdom is that, to convict of a crime, the Government
must prove each element of its case beyond a reasonable doubt. For tax evasion, the Government
must prove a tax due and owing; nobody doubts that proposition as stated. Although the
Government need not prove the precise amount, still its proof must show that a tax was due and
owing and that the amount was substantial. Does the Government have to prove the earnings and
profits calculations to support the dividend treatment that in turn supports the element of the crime
a material tax due and owing?
Lets develop our analysis of this issue with an example that will illustrate some of the
complications. Assume Corporation X wholly owned by individual A is entitled to receive $100
from one of its customers. That customer pays Corporation X in cash. Instead of putting the cash
on the corporate books, A puts it in his pocket. The cash gets reported by neither the corporation
nor the shareholder. The proper tax treatment of that item is that it is income of the corporation and
is a corporate distribution to the shareholder. Sections 301 and 316 of the Code provide that the
distribution to the shareholder is taxed to the shareholder as a dividend to the shareholder to the
extent of the corporation's cumulative or current earnings (E&P); the balance of the distribution,
if any, is taxed either a nontaxable return of capital or a capital gain.
Let's trace the tax consequences. The corporation which earned the $100 must include the
amount in its income. Let's assume that its effective tax rate on the $100 is 34%. Logically, whether
or not the corporation paid the tax, it owes the tax and thus has only a $66 dividend paying capacity
with respect to that $100. Logically, also, its E&P increases by $66. If that is the only item of
income the corporation had and it had no other deductions (set aside the fact that the effective
corporate rate would not apply at this level of taxable income, but assume that it does so that we can
illustrate the point), the corporation could only pay $66 in dividends. (The $34 balance of the $100
actually distributed would be subject to return of capital or capital gain; but assume for purposes of
this illustration that the shareholder has adequate basis in his stock so that the $34 is treated as return
of capital.) Assuming that the individual is taxed at 28% rate on that marginal dividend income of
$66, the tax would be $18.48, and the individual would have $47.52 left over from his income
(setting aside the $34 return of capital). The total tax loss in this example is thus $52.48 ($34
corporate tax and $18.48 individual tax). But, without getting into the details now, it may well be
that the corporation has insufficient E&P to support the shareholder level tax on the dividend.
Let's add two complications to illustrate a major problem.
179
316(a).
See generally Boris I. Bittker and Lawrence Lokken, Federal Taxation of Income,
Estates and Gifts, 92.1.3 (3d ed. 2003).
180
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First, let's assume that the corporation also had $200 net taxable income from other sources
and made no distributions to the shareholder other than the diversion noted above. In that case, the
corporation's E&P is $198 ($300 of net taxable income less $198 of tax), the corporation would still
owe the $34 tax on the marginal $100 in question that was diverted to the shareholder but the entire
$100 diversion would be taxable as a dividend to the shareholder receiving the diversion. E&P is
more than sufficient to cover the entire distribution. The tax loss on the $100 diverted would thus
be $62 rather than $52.48. (In effect, the shareholder has been distributed some of the other earnings
of the corporation.)
Second, instead of assuming other corporate income, assume the corporation had not only
the right to the $100 in question but had $200 of deductions. This would mean that the corporation
had no E&P. The diversion of the $100 to the shareholder therefore would (i) attract no corporate
level tax, (ii) would not be a dividend, and (iii) would be taxed (and then at capital gains rates) only
if and to the extent that the amount diverted exceed the shareholder's basis in the stock. So, if his
basis exceeded $100, for example, there would be no corporate or shareholder level tax that could
be evaded by the diversion. In this example, there is no tax loss resulting from the diversion. (It
may well be that the shareholder may not have contemporaneously recognized and claimed the $200
of deductions, so that when he diverted the $100 cash, he intended to avoid tax at both the corporate
and shareholder levels; but, if the corporation in fact was entitled to the deductions, the Government
will not be able to convict for tax evasion since an actual material amount of tax evaded is an
element of the crime.)
There are a myriad of variations on these examples that will produce varying levels of tax
based upon the corporation's taxable income and E&P.
Now lets go back to the question asked what is the Governments burden, if any, to prove
earnings and profits where it must prove that the taxpayer failed to report shareholder level tax on
the diverted income? As you can see, that issue is heavily dependent upon the existence of E&P so
as to support a dividend in an amount sufficient to convict. Does the Government have to prove
E&P, one of the more murky areas of the tax law, before it may convict?181
The Supreme Court addressed a variation of this issue in Boulware v. United States, 552 U.S.
421 (2008). The issue it technically resolved is whether, in order to require the Government to
prove sufficient E&P to support the element of tax due and owing, the defendant must at least put
in play the issue of whether the defendant or the corporation intended the corporate diversion to
be a dividend from the corporation. As the issue was thus framed, the answer was obvious, for the
statute requires E&P before there can be a taxable dividend as opposed to a return of capital.
Regardless of such intent, there can be no dividend and no tax. A 7201 case must fail, and the
Court so held in a straight-forward unanimous decision.
181
I dont mean to overstate how murky the calculation is. In many, if not most
businesses, it will not be that difficult a calculation to make. Long corporate histories and unusual
fact patterns are what cause the complexities, as discussed further in Bittker & Lokken. Still the
question is, regardless of whether it is a difficult calculation, does the Government have to make it
in order to prove tax evasion of the shareholder level tax.
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In resolving the issue, the Boulware Court referred to a more nettlesome issue. Is the
Government required from the beginning to prove up E&P in such a case as an essential component
of its burden to prove a tax due and owing? Will the Government suffer a directed verdict after its
case in chief if there is no proof of E&P? Recognizing the difficulties and distractions inherent in
a requirement that the Government prove E&P from the get go, the courts have generally required
the defendant do meet some minimal production burden to put the issue in play.
In United States v. Bok, 157 F.3d 157 (2d Cir 1998), the taxpayer was convicted for tax
evasion ( 7201) and tax perjury ( 7206(1)) with respect to his two tax returns. In part here
relevant, the defendant attempted a defense that the corporate diversions were not dividends and
were instead return of capital because the corporation did not have the required earnings and profits.
The jury was not instructed as to the requirement that the corporation have E&P which it must find.
The Court said:
Although our earlier cases have not stated it with perfect clarity, a defendant
does always bear the burden of production under which the defendant must make
an initial showing on each key element of the theory to receive an instruction on
the return of capital theory. That is, there must be some credible evidence that the
corporation did not enjoy income or profits for the tax year at issue, and that the
amount of the taxpayer's capital contribution exceeded the amount of the distribution
from the corporation. The court in Leonard effectively held as much:
In prosecutions for income tax violations, production of a
rather slight amount of evidence by the Government, here the proof
of receipt of what are charitably characterized as constructive
dividends rather than embezzled funds, may transfer the burden of
going forward to the defendant. Although the ultimate burden of
persuasion remains with the Government, Leonard did not introduce
sufficient evidence of an absence of earnings or profits . . . .
Though Leonard used precatory language in discussing the defendant's burden of
production, it did not purport to do away with the general requirement that a
proposed jury instruction must have an adequate basis in fact. To the extent that
Leonard was at all unclear on the issue, we now clarify that in order to merit a charge
on the return of capital theory, a defendant must satisfy a burden of production by
showing that an adequate basis in fact exists for the charge. As suggested by the
cases cited in Leonard, this is not the only circumstance in which a taxpayer faces
a burden of production once the government has come forward with evidence of tax
evasion. See, e.g., United States v. Vardine, 305 F.2d 60, 63 (2d Cir. 1962) (It is
reasonable to require the defendant, if he wishes to disprove intent and likely source
[of a net worth bulge], to bear the burden of going forward when he alleges that he
had additional deductions not claimed on his income tax return.). Of course in cases
involving the return of capital theory, the allocation of the burden of going forward
to the taxpayer does not affect the ultimate burden of persuasion, which always
remains with the government.
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Like the taxpayer in Leonard, Bok failed to satisfy his burden of going
forward and therefore did not establish an adequate basis in the record for his
proposed instruction. Specifically, neither Bok nor the government produced any
admissible evidence to suggest that Abacus lacked earnings or profits for 1988.
Although Bok did introduce Abacus's 1988 financial statements, he made clear that
they were offered only to show Bok's state of mind when he gave information to his
accountant, not for the underlying truth of the figures in the statements. Even if the
financial statements had been admitted for their truth, they alone would not have
satisfied Bok's burden because they were based entirely on information provided by
Bok, purportedly using an entirely different method of accounting than that used on
Abacus's corporate return. In addition, Bok had suggested that Abacus did have net
earnings for 1988. During the IRS's investigation, Bok accounted for the low figures
in the gross receipts portion of Abacus's return by explaining that he had mistakenly
entered the corporation's net profits in place of its gross receipts. At trial Bok
referred to this explanation for the false statements on Abacus's returns in arguing
that he lacked the requisite intent to be convicted. Bok continues to make the same
argument on appeal, noting his contention that the numbers on the gross receipts line
of Abacus's tax returns were really net profits. Brief for Defendant-Appellant
David S. Bok at 36. Finally, Bok declined the trial court's invitation to elicit facts to
support his proposed charge. Because Bok's accountant had not been qualified as an
expert witness, the trial court rejected Bok's attempt to establish through the cross
examination of the accountant that, as a matter of law, a return of capital was a
nontaxable event. In doing so, however, the trial court expressly suggested that Bok
use the witness to develop facts that Bok might later use as the basis for a jury
instruction; Bok did not follow up on the trial court's suggestion.
Thus, despite our generous approach to jury instructions, under which the
defendant is entitled to an instruction on his theory when there is some foundation
in the proof, no matter how tenuous, Bok did not provide sufficient facts to warrant
his proposed charge. Given the lack of evidence produced by Bok on the issue of
Abacus's earnings or profits, we cannot say the trial judge erred in finding no basis
in the record for the return of capital theory. Because Bok failed to satisfy his burden
of production, the trial court properly rejected Bok's proposed instruction.
-----------[END OF BOK CASE]------------Is it right that the Government can shift to the Defendant any burden with respect to an
element of the crime? The courts pay homage to the requirement that the Government prove the
elements beyond a reasonable doubt and that it is not incumbent upon the defendant to do anything.
Yet, as you see, the defendant is required to mount this defense as to an element of the Government's
case because of a shifting trial burden. I will return to this issue from time to time, for the
defendant's counsel must be keenly aware when some burden has been shifted to the defendant.
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The Supreme Court in Boulware recognized the issue and ducked it as follows:
Boulware does not dispute that he bears the burden of producing some
evidence to support his return-of-capital theory, including evidence that the
corporation lacked earnings and profits and that he had sufficient basis in his stock
to cover the distribution. See Tr. of Oral Arg. 53. He instead argues that, as to the
with respect to . . . stock requirement, it suffices to show [t]hat he is a
stockholder, and that he did not receive this money in any non-stockholder capacity.
Id., at 57. The Government, for its part, on the authority of Holland v. United States,
348 U.S. 121 (1954) and Bok, 156 F.3d at 163-164, argues that Boulware must offer
more evidence than that. We express no view on that issue here, just as we decline
to consider the more general question whether the Second Circuit's rule in Bok,
which places on the criminal defendant the burden to produce evidence in support
of a return-of-capital theory, is authorized by Holland and consistent with Sandstrom
v. Montana, 442 U.S. 510, 99 S. Ct. 2450, 61 L. Ed. 2d 39 (1979), and related
cases.182
On remand in Boulware case, however, the Ninth Circuit actually read the opinion consistent
with Bok as requiring the defendant to meet a production burden.183 Applying that perceived
requirement, the Ninth Circuit zapped Boulware by finding that that the defendants offer of proof
to meet that production burden was not sufficient to put the return of capital defense in play. The
Ninth Circuits opinion can be criticized as results oriented in the way it resolved the particular case
before it, but does give a clear roadmap for what the careful lawyer must do to tee up the defense
in the future.
But, lets go back to the Supreme Courts cryptic reference to Holland in the context of
determining whether imposing a production burden on a defendant was consistent with the normal
criminal requirement that the Government prove its case beyond a reasonable doubt. The cryptic
reference to Holland is apparently to the part of Holland that says, in effect, once the Government
proves the elements of the crime, the defendant stands quiet at his peril. I dont think the Supreme
Courts comment in Holland meant that a formal production burden had shifted to the defendant;
rather, I think the court was dealing with practical trial dynamics where, with the Government
having produced some evidence, the risk to the defendant is that the jury will find it persuasive. If
that is correct, as to the E&P issue, that simply begs the question unless the Government in its case
in chief has proved up E&P. But, the reference to Sandstrom v. Montana, which dealt with the
effect of presumptions in criminal cases, suggests that the Court may have been thinking of some
type of presumption that the corporation has E&P that carries the day for the Government in the
absence of some evidence from the defendant that there is no E&P to support the dividend. This
may well be the practical effect of Bok, by placing a burden of production on the defendant. As
noted, however, the Supreme Court expressed no view on whether that type of shift of burden to the
defendant on the element of the crime is appropriate, and thus leaves resolution of the issue to
another day.
182
183
552 U.S. at 421, fn. 14 (2008).

United States v. Boulware, 558 F.3d 771 (9th Cir. 2009).
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Many contexts other than corporate diversions or E&P uncertainties present the same issue
as to when, despite the concept that the Government must prove each element beyond a reasonable
doubt, a legal or practical burden shifts to the defendant. Does the Government make a tax evasion
case simply by showing that a taxpayer omitted an item of income from his return? What if the
taxpayer failed to report deductions, so that there either was not a tax due and owing or, if there was,
the amount was not material? Must the Government prove not only the omitted income but also the
negative -- i.e., that the taxpayer's other tax attributes did not wipe out the tax effect of the omitted
income? Is the burden shifted to the taxpayer to prove that he or she did not have a tax due and
owing? I don't know that this issue has ever been that sharply defined for a court decision. The
Government will certainly attempt to correctly determine the taxpayer's liability in its investigation
and not even bring the case if there are offsetting deductions. But how does the Government prove
that there were no offsetting deductions? And, if the case gets to trial, can a taxpayer rest on the
Government's failure to prove beyond a reasonable doubt that there were no offsetting deductions?
More practically, of course, if there are offsetting deductions, the taxpayer will want to try to prove
them in his or her defense. Once the taxpayer puts them in play, presumably, the Government would
then have to prove beyond a reasonable doubt that the deductions were not available, otherwise it
will have not shown a tax due and owing beyond a reasonable doubt. (But, as I note in discussing
proof issues related to the net worth method, for such items as this, as a practical matter, the burden
of proof has really been shifted to the defendant.)
As I discuss later, with respect to corporate diversions, certain conventions have arisen in
the sentencing phase of the case which may permit a sentencing court to determine the sentencing
tax loss without getting hung up on these technicalities. The question I present here -- and do not
answer -- is whether these conventions, in effect, apply to the case in chief where the Government
is required to prove the elements of the offense beyond a reasonable doubt?
f.
Who Can Be Guilty of Tax Evasion - Taxpayers Surely;

Any Others?
The run of the mill tax evasion case involves the taxpayer. But, the taxpayer may have
helpers who assist in the evasion or the taxpayer may even be innocent of evasion but persons other
than the taxpayer can commit the crime. The taxpayer and the evader both directly commit the
crime if their actions meet the elements of the crime: (i) a tax due and owing by someone, (ii) an
affirmative act to evade the tax, and (iii) willfulness. The statutory text does not limit the crime to
the taxpayer involved.184 For the same reason, the taxpayer need not even be guilty of the crime of
tax evasion in order to directly convict an enabler meeting these elements of tax evasion. In the
jargon used in these cases, the enabler so guilty of evasion is an actual principal in the crime of tax
evasion. The Government does not need any other theory to impute liability to the enabler.
There are theories that may impute liability for a substantive offense where the enabler is not
directly guilty of the substantive offense. These theories are only needed when the enabler is not
otherwise a direct principal (or, perhaps, where it is not clear whether the enabler is a principal, and
184
E.g., United States v. Gordon, 242 F.2d 122 (3 Cir. 1957), cert. denied 354 U.S. 921
(1957).
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a an alternative theory is needed for conviction if the enabler could be found not to be a principal).
I think it important to look at these provisions critically because, I think, at least in some tax evasion
cases, they are not helpful to the issue of the defendants liability for tax evasion.185 Since these
theories impute liability, I refer to them as derivative liability provisions. Analysis of the
concept I present here is best developed in a type of case recently prosecuted where enablers of tax
shelters (tax shelter designers and promoters) sold allegedly fraudulent shelters of such considerable
complexity that the taxpayers themselves did not realize were fraudulent and therefore the taxpayers
did not commit tax evasion. Under the concept I develop here, the enablers could be directly guilty
of the crime of tax evasion. If that is true (and it is) what role does and should the derivative liability
theories serve? I am going to introduce the theories very lightly here because I discuss them in
more detail in later points in the book. Bottom line, the key concept is that, if an enabler takes
actions which would potentially invoke one of these derivative theories, at least in the case of tax
evasion, those actions are sufficient to make the enabler directly liable for the crime without the
derivative liability provision and the derivative liability provisions should play no role in the
determination of whether the enablers should be convicted of a crime. So lets look briefly at the
theories.
First, accomplice liability often referred to as aider and abetter liability under 18 USC
2(a) can make a person liable as a principal for a substantive crime that the accomplice aids
and abets another person to commit the substantive crime. In the tax shelter situation posited, this
would require that someone other than the enabler defendant have committed the crime of tax
evasion. That normally would be the taxpayer, but I have posited here that the taxpayer is not guilty
of tax evasion. Thus, assuming that all charged enablers stand in the same relationship to the crime
of evasion, they are either (i) all directly guilty of the crime of tax evasion or (ii) innocent of evasion
under the accomplice liability theory because there is no principal who committed the crime
allegedly aided and abetted.
Second, causer liability under 18 U.S.C. 2(b) can make an enabler punishable as a
principal if he or she caused the commission of the crime of tax evasion but is not otherwise guilty
of a direct principal of the crime of tax evasion. Here, however, acts that cause the commission of
the crime of tax evasion will make the actor (the causer) directly liable for the crime without the
need for causer liability under 2(b). Indeed, I submit that causer liability is applicable only if the
enabler cannot legally be guilty of the substantive crime involved he or she caused another person
to perform the actus reus, but is not applicable in this case because enablers can be directly guilty
of the crime of tax evasion.
Third, Pinkerton conspirator liability can make a conspirator who does not actually commit
the crime liable for the crime committed by another conspirator within the scope of the conspiracy.
185
Judge Pauley so held in the case of United States v. Daugerdas, et al. (SD NY S3 09
Cr. 581 (WHP)) and declined to give these instructions. In two earlier cases similar to the
Daugerdas fact pattern (tax shelter enablers), other district judges in SD NY had given these
derivative liability instructions. I think Judge Pauley got it right. See John A. Townsend, Theories
of Criminal Liability for Tax Evasion (May 15, 2012). Available at SSRN:
http://ssrn.com/abstract=2060496 or http://dx.doi.org/10.2139/ssrn.2060496.
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Like accomplice liability, there must be some conspirator acting directly as a principal who actually
commits the crime for some other conspirator to be held liable under Pinkerton. However, in the
case posited, the taxpayer does not commit the act of evasion and is not a member of the conspiracy.
In the case posited, again assuming that all charged enablers conduct is of the same genre relative
to the commission of the crime of tax evasion, they are either all principals or they are not guilty
under Pinkerton because there is no principal directly guilty of the crime.
The point I want you to know for now is that persons other than the taxpayer can be guilty
of the crime of tax evasion through these derivative liability provisions but it is critical to focus
carefully on the actual facts being considered to see if the derivative liability provisions really make
sense in the context of the facts. I discuss these issues further below and in even more detail in an
article.186
g.
Ex Post Facto Solutions to Tax Evasion.
What is the taxpayer to do once pregnant -- i.e., once the taxpayer has committed an act of
tax evasion, usually by filing a fraudulent return? Death will solve the criminal problem, but most
taxpayers will not choose that option. What are the other options?
One feature of our tax system is that the rigors of the annual accounting tax system are
mitigated by certain carrybacks (e.g., net operating loss carrybacks) that are generated after a tax
year and carried back to an earlier tax year. Can a taxpayer who commits tax evasion for year 01
when a tax is due at the time he files a false return for year 01 avoid a tax evasion charge for year
01 by generating in a later year a net operating loss or other carryback that ex post facto wipes out
the tax liability for year 01? Do I need to answer that question for you?
A similar tack could be taken with an amended return. A taxpayer having committed evasion
with respect to an original return might file a correct amended return. Should that purge the fraud?
Do I need to answer that question for you?
There is one ex post facto strategy that can save the day, however, and it does involve an
amended return. That is the voluntary disclosure strategy. I deal with this strategy in some detail
below.187 I urge you to keep it in mind, however, because it is usually a strategy available with
respect to most of the commonly encountered tax crimes.
B.
Tax Perjury ( 7206(1)).

1.
The Statute.
Sec. 7206. Fraud and false statements

Any person who-186
The article is currently in draft form. I will add the title and citation later when
finalized.
187
See below beginning at p. 552.
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(1) Declaration under penalties of perjury. Willfully makes and subscribes

any return, statement, or other document, which contains or is verified by a written
declaration that it is made under the penalties of perjury, and which he does not
believe to be true and correct as to every material matter; * * * *
***
shall be guilty of a felony and, upon conviction thereof, shall be fined not more than
$100,000 ($500,000 in the case of a corporation), or imprisoned not more than 3
years, or both, together with the costs of prosecution.
2.
The Elements.
The Fifth Circuit Pattern Jury Instructions provide (2.97):

Title 26, United States Code, Section 7206(1), makes it a crime for anyone
willfully to make a false material statement on an income tax return.
For you to find the defendant guilty of this crime, you must be convinced that
the government has proved each of the following beyond a reasonable doubt:
First: That the defendant signed an income tax return that contained a written
declaration that it was made under penalties of perjury;
Second: That in this return the defendant falsely stated that _______ [state
material matters asserted, e.g., the defendant received gross income of $_______
during 19__];
Third: That the defendant knew the statement was false;
Fourth: That the false statement was material; and
Fifth: That the defendant made the statement willfully, that is, with intent to
violate a known legal duty.
3.

a.
Tax Perjury.
This crime is often referred to as the tax perjury statute because it criminalizes the making
of a false statement under penalty of perjury.188 Tax perjury is broader than perjury in the general
criminal law, 18 U.S.C. 1621, because corporations can be guilty of tax perjury.189 It is interesting
to note that the general federal perjury statute imposes a 5 year maximum sentence whereas
7206(1), tax perjury, imposes a 3 year maximum sentence. One could infer that the legislature has
evidenced a belief that tax perjury is only 60% as damaging to society than is perjury in the setting
of other sworn testimony.
188
189
United States v. Scholl, 166 F.3d 964, 980 (9th Cir. 1989).
See Ingredient Technology, discussed below.
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b.
Materiality.
Read literally, 7206(1) does not require a false document actually false as to a material
matter or even a false document; all it requires is that the defendant have believed it was false as to
a material matter. Read that way, however, the statute would convict for a bad intent even if the
return or other document in fact was not false as to a material matter. Fortunately, 7206(1) is not
construed literally in this respect. The defendant must have made or subscribed a return, statement
or other document that was in fact false as to a material matter. (See the pattern jury instruction
above and see discussion below of what constitutes materiality.)
Although the false statement must be material, the false statement need not involve
substantial amounts. E.g., United States v. Helmsley, 941 F.2d 71, 92 (2d Cir. 1991), cert denied,
502 U.S. 1091 (1991) (in holding that substantiality was not required to be charged to the jury
because the statute does not require it as an element, even though the indictment had alleged
substantiality; the court held: False statements about income do not have to involve substantial
amounts in order to violate this statute.).190 There thus is a difference between materiality (required
for conviction) and substantiality (not required), so we now move to a discussion of that issue.
What if the taxpayer overstates his income on the return and thus overstates his tax liability?
Is the materiality requirement met? A district court recently handled this argument in a 7206(2)
prosecution of a taxpayer and his loan broker who had prepared the taxpayers return overstating
income in order to obtain a loan from an organization known as the Money Store Investment Corp.191
Marin argued that giving the IRS more than it was due was not material. The Court viewed the
materiality requirement in 7206(1) (taxpayers false statement on return) and 7206(2) (preparers
false statement on return) as being in pari materia. The Court thus reasoned:
In any event, neither case would govern over United States v. Peters, 153
F.3d 445, 461-62 (7th Cir. 1998), on which the government relies. There, the
defendant argued that the government had to prove a tax deficiency in order to
convict under section 7206(1), which argument amounted to a contention that unless
there was a tax deficiency the false statement was not material. The court rejected
that argument, holding that proof of a tax deficiency was not essential to prove
materiality. The court set out the elements of the offense including a definition of
material: A false statement is material when it has the potential for hindering
the IRS's efforts to monitor and verify the tax liability of the corporation and the
taxpayer. [Q]uoting United States v. Greenberg, 735 F.2d 29, 32 (2d Cir. 1984); see
United States v. DiVarco, 484 F.2d 670, 673 (7th Cir. 1973) (Even though the
government did not prove understatement of income, the court held that a false
statement as to source of income on a tax return was material, relying in part on the
policy that the IRS is entitled to accurate information). There is, of course, no
question that the amount of income on a tax return is material in that it would have
190
See also United States v. Aramony, 88 F.3d 1369, 1384-5 (4th Cir. 1996) (citing
Helmsley).
191
United States v. Bouzanis, 2003 U.S. Dist. LEXIS 3289 (N.D. Ill. 2003).
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the potential for hindering the IRS's efforts to monitor and verify Bouzanis' tax
liability; thus it follows that this indictment alleges a violation of section 7206(2).
I deal with materiality again in more detail below.192 Suffice it to say now that, in the
application of this element of the offense, it has nothing to do with the intent of the maker or
subscriber. The question is solely one of materiality as determined by the trier of fact. Materiality
is a requirement the application of which is heavily fact dependent. But the question that must be
asked and answered is: Material relative to what?
Obviously the element covers a false statement that materially lowers the actual tax reported
on the return. That covers much, but not all, of the ground covered by 7201. The additional
element required by 7201 is an intent to evade, which need not be shown under 7206(1). So,
7206(1) does not require a tax due and owing.193 Hence 7206(1) can apply when 7201 cannot.
Indeed, 7206(1) may apply to a false statement that fully pays the tax liability or even materially
overstates the tax liability. For this reason, it is sometimes said that evidence that there is no tax due
and owing is irrelevant in a tax perjury case (see the quoted case above), but wouldn't the lack of
a tax due and owing and intent to evade same be relevant to the issue of intent or motive to commit
tax perjury?194 Moreover, from a prosecutorial judgment call standpoint, is it likely that the
Government will pursue someone for a false statement where that taxpayer has in fact correctly
reported the tax liability or even over reported and overpaid the tax liability?195 This is unlike a tax
protestor scheme intending to disrupt the system beyond the individual taxpayer involved. And, if
the IRS really suffered no loss (or no material loss) in tax, you will find when we review the
Sentencing Guidelines that sentencing will be minimal (almost certainly probation unless the
taxpayer has a significant criminal history) and the ripple effect to other taxpayers will be almost
minimal because there will be no significant publicity. Accordingly, in virtually every 7206(1)
prosecution (but not all), the Government will believe that it can establish a material tax loss and
will do so at the time of sentencing.
So, what is the standard for materiality, if it is to be something other than a gut reaction to
the facts in any given case?196 The courts have applied two tests, only one of which seems
satisfactory. Some courts have held that anything required to be disclosed on the return is material
or, in a variation, anything that is likely to affect the calculation of tax due. That does not seem
wholly satisfactory, for it assumes materiality merely from the IRSs choice to include the disclosure
requirement on the return or the taxpayers understanding of what is likely to affect the tax liability.
192
See discussion below, par. 114.

United States v. Johnson, 558 F.2d 744, 745 (5th Cir. 1977).
194
See United States v. Loe, 248 F.3d 449 (5th Cir. 2001).
195
For example, what if a taxpayer lies about having signatory authority over a foreign
bank account but properly reports all income he had, including the interest from the foreign bank
account that he denied having signatory authority. The Government may have a technical 7206(1)
case, although the proper reporting may put pressure on the Governments ability to prove
willfulness because there is no motive to lie.
196
See generally Jennifer Gibbons, Proof of Tax Deficiency - The Silent Element in
False Statement Charges, 50 Ariz. L. Rev. 337, 345-6 (2008)
193
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The second, more satisfying test, is the so-called DiVarco197 test basing the materiality determination
upon whether the false item has a natural tendency to influence or impede the IRS in determining
and auditing the taxpayers liability. Some courts blend the tests.198
Under this test of materiality, therefore, a drug dealer who reports his drug activities on
Schedule C as a law firm business and pays all taxes due can be convicted, for his statement of the
nature of the business could tend to influence or impede the IRS in the determination and
substantiation of his correct tax liability.
c.
Declaration of Perjury.
This element should be evident. The document is usually a return, which we all know has
a declaration that it is signed under penalty of perjury. The penalty of perjury declaration is
commonly referred to as a jurat. This charge is not available if the taxpayer submits a false
document without a declaration of perjury. That does not mean that submitting a false document
is not a crime. I discuss below 18 U.S.C. 1001199 which deals with submitting false statements,
including false documents to a Government agent. Submitting false documents might also be
covered by 7212 and in specific settings might also be covered by 7206(2) and 18 U.S.C. 287.
So, to repeat, the document (usually a tax return) must be submitted under penalty of perjury.
Hence, the crime is often referred to as tax perjury.200
197
United States v. DiVarco, 343 F. Supp. 101, 103 (N.D. Ill. 1972), aff'd, 484 F.2d 670
(7th Cir. 1973), cert. denied, 415 U.S. 916 (1974); see also United States v. Pirro, 212 F.3d 86 (2d
Cir. 2000), quoting United States v. Peters, 153 F.3d 445, 461 (7th Cir. 1998) (citations omitted),
cert. denied, 525 U.S. 1070 (1999).
198
See Jennifer Gibbons, Proof of Tax Deficiency - The Silent Element in False
Statement Charges, 50 Ariz. L. Rev. 337, 345-6 (2008) (citing e.g., the First Circuit pattern
instruction defining a material false statement as one that is likely to affect the calculation of tax
due and payable, or to affect or influence the IRS in carrying out the functions committed to it by
law, such as monitoring and verifying tax liability.)
199
See below beginning on p. 213.
200
In a curious case, a defendant complained on appeal that the trial judge would not let
her counsel refer to 7206(1) case as a perjury case in cross examining a witness. The trial judge
instead told the jury at the time that it was a tax case. The defense counsel at trial did not pursue the
claimed wrong, and the judge adequately instructed the jury as to the nature and elements of the
crime. On appeal, the panel applied the plain error review rule to reject the defendants argument
that he was entitled to have it refer to the case as a perjury case in questioning the witness. The
panel questioned whether the defendant was entitled to call the case a perjury case, but held that the
error, if one there be, was not plain. Even though I think the defense counsel was entitled to refer
to the case as a perjury case, perhaps tax perjury, I have to ask the question of why a defendant
would really prefer to have the case called a perjury case rather than a tax case. It seems to me that,
for the typical juror I imagine, calling something a perjury crime sounds more serious than a tax
crime. In this regard, even as to tax perjury, Congress must have thought the crime less serious than
regular perjury for it enacted a 5 year maximum sentence for perjury but only a 3 year maximum
sentence for tax perjury. See United States v. Bishop, 629 F.3d 462 (5th Cir. 2010).
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As contained on the Form 1040, the jurat states

Under penalties of perjury, I declare that I have examined this return and
accompanying schedules and statements, and to the best of my knowledge and belief,
they are true, correct, and complete. Declaration of preparer (other than taxpayer)
is based on all information of which preparer has any knowledge.
Note from the express language of the jurat that (1) the schedules to the return are included within
the scope of the jurat and (2) return preparers are also covered by the jurat so as to be subject to
7206(1), although DOJ believes that it is usually better to charge return preparers under 7206(2)
which I discuss later.201
Occasionally, taxpayers will submit false documents with the jurat stricken. If that occurs,
the false statements therein cannot be prosecuted under Section 7206(1), but, as developed below,
the Government has ample alternative criminal prosecutions (e.g., 7203 (failure to file) and 18
U.S.C. 1001 (false statements)) to make for this type of conduct. Furthermore, civil penalty
disincentives apply to such conduct because no return was filed, failure to file delinquency
penalties would apply202 and the statute of limitations on assessment would stay open indefinitely.203
d.
Belief as to Truth.
In submitting the document the defendant must believe that the document is not true as to
a material matter. I have discussed above that the misstatement must be in fact material. The
element is a subjective one. Did the defendant believe that the document submitted under penalty
of perjury was false as to a material matter (in addition to it actually being false as to a material
matter)?
What if the return was actually false as to a material matter, but the taxpayer subjectively
believing it to be false did not believe the matter was material? Lets take the local thug who has
a protection racket in his neighborhood but who wants to pay his tax. He dutifully reports his gross
receipts and doesnt claim any deductions, but falsely reports that it came from his consulting
business. I have noted above that falsely stating the activity giving rise to the income is material.
But, would this local thug believe that that misstatement was material? Not being a sophisticate in
the imperatives of the tax system, this local thug might believe that if he correctly reports (even
over-reports) his income, the IRS can have no beef and that any errors would not be material. Of
course, the local thug must know that his act of misdescribing his income source may mislead the
201
See DOJ CTM 12.07[2] (2008 ed.) (stating that it is better practice to charge the
preparer under 7206(2)). For the proposition that the preparer can be charged under 7206(1),
the CTM cites United States v. Shortt Accountancy Corp., 785 F.2d 1448, 1454 (9th Cir. 1986)
which held that 7206(1) and (2) are companion provisions differing in emphasis more than
in substance. The key difference, of course, is the 7206(1) does require a declaration of perjury,
whereas 7206(2) does not.
202
6651(a)(1).
203
6501(c)(3).
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IRS and make it less likely that the IRS will audit. But to him that is not material since he has
correctly reported even overreported his income. The local thug takes the stand and testifies that
the misdescription was based upon his concern that the IRS would turn it over to state or local vice
authorities and that he had no idea that it would affect tax administration. Is he guilty? Is this a jury
issue?
e.
Willfulness.
The taxpayer must have submitted the document willfully with the intent to mislead and thus
violate the law. Willfulness is the same as we covered as under Section 7201 -- a voluntary,
intentional violation of a known legal duty.204
This element, of course, merges with the third element, for if the taxpayer submits a
document knowingly false as to a material matter, he almost certainly did so willfully (unless, of
course, he can show that some compulsion negates willfulness even if false). The devil made me
do it will not be a defense, but its cousin (lack of mental capacity to commit the offense) might.
f.
Tax Due and Owing Not Required.
I noted above that a tax due and owing is not an element of 7206(1) as it is with 7201.205
Since the Government sometimes encounters difficulty in proving a material tax due and owing, it
will often charge the taxpayer under 7206(1) when it could have charged the taxpayer under
7201. It makes the Government's burden at trial less. Hence, in order to lighten its burden and get
the maximum bang for its prosecutorial buck, the Government may charge 7206(1).
The Governments burden in a 7206(1) case may not always be lighter on this issue than
in a 7201 case. The proof required to show a tax due and owing may substantially overlap what
is required to show that the return is false. For example, if the false claim on the return is omitted
income or overstated deductions, the fact that there is a tax due and owing is self evident.206 Second,
204
Cheek v. United States, 498 U.S. 192, 200 (1991).

Boulware v. United States, 552 U.S. 421, 433 n. 9 (2008), where, although it did not
decide the issue directly, the Court said with apparent approval that the courts of appeals are
unanimous in so holding. Thus, for example, even if at sentencing the court is unable to conclude
by the more lenient preponderance of the evidence standard that there is even a tax loss, the
defendant can still be guilty of 7206(1). United States v. Scholl, 166 F.3d 964, 981 (9th Cir.
1999). (holding that the district court did not err in finding, during sentencing, that there was
insufficient evidence to make a reasonable estimate of tax loss, where the jury convicted the
defendant of violating 26 U.S.C. 7206(1)).
206
The Supreme Court noted in Boulware that, depending on the nature of the false
statement on the return, the burden 7206(1) may parallel the burden for a 7206(1) case. Thus,
in Boulware, the defendant was charged with a constructive dividend through the diversion of funds.
The Government charged 7201 but, as noted earlier, the Supreme Court in Boulware required that
the Government shoulder the burden of proving that there was a dividend if the defendant puts that
issue in play. If the Government has concerns in a constructive dividend case about making its proof
205
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from the practical consideration of whether the Government will even want to charge a tax crime,
the Sentencing Guidelines require that, at least by sentencing, the Government must prove a
substantial tax due and owing (albeit with a preponderance burden) in order to get an incarceration
sentence, and the Government is unlikely to use its limited prosecutorial resources in cases where
it cannot obtain at least a good possibility of incarceration. For this reason, I have never seen a
7206(1) case where there is not a substantial tax due and owing. The exception, of course, is where
the prosecution may be driven by some nontax agenda (e.g., in the war on drugs, if a drug dealer
properly reported his income and paid all tax, but falsely stated his occupation).
g.
Required Documents.
The Fifth Circuit has limited this crime to documents required by law or applicable
regulation.207 Other circuits have, however, rejected this limitation,208 and even the Fifth Circuit has
limited its holding.209
In a variation of this theme, taxpayers have argued that, if the document is not required to
be filed, then the filing of a false document cannot be prosecuted under 7206(1) or its companion
7206(2). In United States v. Anderson,210 the defendants filed false Forms 8300 (currency
transaction reports) naming individuals they desired to harass and incited others to do likewise. In
each of the instances, the persons named had not paid cash in excess of $10,000. The IRS
prosecuted the defendants under 7206(1) and 7206(2). The defendants argued that, if there is
no duty to file a return (as there would not be if they had not received cash in excess of $10,000),
they cannot be prosecuted for filing a form with false information either because it cannot be a
willful violation or because the falsity cannot be material. The court handily rejected the argument
because, even if they had no duty to file the return, once they did so they had an obligation to file
a true and correct return or document. Filing a return with knowingly false information is therefore
willful and material if, as noted elsewhere in these materials, the false information has a tendency
to influence the operations of the IRS. Obviously, the defendants intent with respect to the false
of earnings and profits to support a dividend, could the Government charge 7206(1)? The Court
had this to say (n. 9):
it is arguable that the nature and character of the funds received can be critical in
determining whether . . . 7206(1) has been violated, [even if] proof of a tax
deficiency is unnecessary, 1 I. Comisky, L. Feld, & S. Harris, Tax Fraud & Evasion
P2.03[5], p. 21 (2007); see also Brief for Petitioner 15-16. The Government does not
argue that Boulware's 7201 and 7206(1) convictions should be treated differently
at this stage of the proceedings, however, and we will accede to the Government's
working assumption here that the 7201 and 7206(1) convictions stand or fall
together.
Of course, that phenomenon is not necessarily at play in most 7206(1) cases.
207
United States v. Levy, 533 F.2d 969 (5th Cir. 1976).
208
E.g., United States v. Holroyd, 732 F.2d 1122 (2d Cir. 1984).
209
United States v. Damon, 676 F.2d 1060 (5th Cir. 1982) (holding that schedules
attached to the return which is signed are part of the document required to be signed).
210
353 F.3d 490 (6th Cir. 2003).
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CTRs was to cause the IRS to expend resources dealing with the named individuals thus harassing
them.211
h.
Ingredient Technology.
A leading 7206(1) case is United States v. Ingredient Technology Corporation, 698 F.2d
88 (2d Cir. 1984), cert. denied 462 U.S. 1131 (1983). The Government prosecuted a corporation
and some of its officers for conspiracy (a concept I discuss below) and 7206(1) for a scheme to
avoid invading the corporate taxpayer's LIFO base level, which would have resulted in significant
tax. The LIFO method of accounting treats the last purchased inventory as the first out. (By
contrast, the FIFO method treats the first purchased inventory as the first out.) In a period where
the cost of inventory is rising (a sustained economic condition now for many years), the taxpayer
gets a benefit (higher cost of goods sold and less taxable income) so long as the year-end inventory
level is sustained. The benefit is that tax attributable to the economic activity is deferred. (It
operates somewhat like a tax shelter, at least as compared to its FIFO counterpart.) The deferral,
however, begins to end as and when the inventory level decreases. The LIFO base is said to be
eroded or invaded. In effect what happens as inventory declines is that the historical low cost of the
inventory items paid many years ago gets assigned as cost of goods sold; since the historic cost is
so low, much larger amounts of taxable income are generated.
So, the corporation wanted to avoid invading its LIFO base (i.e. decreasing its inventory
relative to prior periods). But, the corporation also wanted to enhance profits by better managing
inventory. This meant, generally, keeping the minimum inventory possible for its business
operations. (This is a rough precursor of the notion of JIT (Just in Time) inventory concepts.)
Recognizing that this business imperative would, if sustained through the year end, cause its LIFO
base to be eroded, thus generating the deferred taxes, the officers of the corporation entered
contracts whereby they purchased inventory (raw sugar) at year-end (thus increasing their inventory
so that the LIFO base was not invaded) and immediately after year-end sold the sugar back to the
company from whom it had purchased it. Physical storage of the underlying sugar did not change
hands; only raw title changed hands for the short period. There was no profit on the transaction, and
it was done solely to show a large amount of inventory on hand at the end of the year.
Two other significant facts were sub rosa. First, the officers of the corporation and the
putative seller/re-purchaser of the sugar entered a secret agreement as to the resale of the sugar.
Second, evidencing that the seller/re-purchaser considered it a sham from the inception, the seller/repurchaser declared title to the sugar to a regular customer whom it had already entered a contract
with.
As a defense to the 7206(1) charge, the defendants argued that, as a matter of law, the
corporation was entitled to include the inventory because it had legal title and risk of loss. The
Court rejected the argument, treating the entire arrangement as a sham, devoid of business purpose
and done solely to affect tax liability. In so holding, the Court relied on Supreme Court authority
for the proposition that taxation is concerned with the reality of actual command over property rather
211
See also United States v. Pansier, 576 F.3d 726, 731 (7th Cir. 2009).
- 113 -
than the refinements of title. Here, the seller/re-purchaser had command and even sold the same
sugar to one of its customers while it was purportedly owned by the corporation. The court
concluded:
We conclude that the concept of inventory from an accounting point of view
and the term inventory in the applicable Treasury Regulations would be meaningless
were there to be included in the term or concept property bought, agreed to be resold,
never intended to be utilized in the trade or business of the taxpayer (except for tax
purposes), and in fact under the corporate taxpayer's dominion, control, and at its risk
about as long as the pea in the proverbial shell game is under the shell.212
The Court also rejected a James-Garber type argument -- which it styled a Due Process
argument -- that, the legal defects in the planning were not sufficiently clear to support a criminal
prosecution. The court rejected that argument. Here, the defendants knew what they were doing
was wrong which is why they had the secret agreement and then even lied to their auditors about the
pre-commitment to re-sell. The Court also rejected the Garber holding that uncertainty in the law
was a jury issue as to which evidence could be adduced and the jury decide.
i.
Further Notes on Materiality.
Section 7206(1) requires that the false statement be in fact material and that the taxpayer
acted with the knowledge that it was material. Logically, one would think, the jury must make those
findings. For many years, however, most courts of appeals held that materiality was a question for
the judge to decide rather than a question that was submitted to the jury. In United States v.
Gaudin,213 the Supreme Court rejected that notion, stating that where materiality is part of the
element of the offense, it is a mixed question of fact and law that must be decided by the jury.
The Court reasoned:
[t]he resolution of the question before us seems simple. The Constitution gives a
criminal defendant the right to demand that a jury find him guilty of all the elements
of the crime with which he is charged; one of the elements in the present case is
materiality; respondent therefore had a right to have the jury decide materiality.
The Court handily rejected the Governments attempts to avoid the force of this relatively
simple syllogism (which, of course, had escaped most courts of appeals for years).
Gaudin involved a prosecution under 18 U.S.C. 1001, which makes it a felony to make
false statements as to a material fact. (This False Statement crime in Title 18 frequently surfaces
in tax prosecutions because of statements made to IRS officers, particularly revenue agents
conducting audits and collection officers trying to collect assessed taxes.) Materiality is an element
of many crimes, either explicitly or implicitly, and 7206(1) is one of them. Accordingly, Gaudin
212
213
P. 95.
515 U.S. 506 (1995).
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has sweeping implications in the many criminal contexts in which materiality is either expressly
required by the statute or, if missing from the statute, the statute is interpreted to include this
requirement. After Gaudin, the defendant and the Government must make their materiality pitches
to the jury, and the jury may very well be swayed by different considerations than a judge would.
The Court in Gaudin defined materiality as:
The parties also agree on the definition of materiality: the statement must
have a natural tendency to influence, or [be] capable of influencing, the decision of
the decisionmaking body to which it was addressed. * * * *.
See also Neder v. United States, 527 U.S. 1, 16 (1999) ( 7206(1)). This is a good working
definition for tax crimes as well. As defined, materiality is an objective determination did the
action have the natural tendency to affect the fraud? It is not whether, in fact, the action did affect
the fraud by actually influencing the actions of the decisionmaking body.214
Gaudin raised significant questions as to what to do about the many cases in the pipeline or
already finally decided where a citizen was convicted without this critical issue being submitted to
and decided by the jury. In many of these trials, the defendants counsel did not object to the
decision of the materiality issue by the judge. Many times, that was the law of the circuit, and to
object would have been meaningless. After Gaudin, serious issues revolved around whether these
defendants would get new trials. Or if some would and some wouldnt, how would the cut be made?
At this point, concerns of managing the federal court caseload crept into the judicial
decision-making process and caused much judicial thrashing over the unknowable issue of whether
the defendants fundamental rights were violated.
In Neder v. United States,215 the Supreme Court held the issue was subject to a harmless error
analysis. Harmless error will be found and thus conviction affirmed only if it is found harmless
beyond a reasonable doubt.216
Finally, consider the following discussion rejecting an attack on instructions on the
materiality element in a 7206(1) prosecution:
Although the district court did not instruct on the computation of capital gains
income, it specifically did instruct the jury that it must find falsity as to a material
matter: To sustain the charge that the defendant willfully made and caused to be
made a false individual income tax return as charged in Counts 2 and 3, the
Government must prove the following propositions: . . . the income tax return was
false as to a material matter, as charged in the count . . . . R.39. The court also
charged the jury as follows:
214
Cf. United States v. Irvin, 682 F.3d 1254, ___ (10th Cir. 2012) (mortgage fraud case).
527 U.S. 1 (1999).
216
For an example of the application of the Neder test, see United States v. Foster, 229
F.3d 1196 (5th Cir. 2000).
215
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A line on a tax return is a material matter if the information

required to be reported on that line is capable of influencing the
correct computation of the amount of tax liability of the individual or
the verification of the accuracy of the return.
If you find that the defendant willfully understated the amount
of total income on her individual tax return, and if you find that the
amount of gross receipts on a tax return is essential to a correct
computation of the amount of taxable income or tax or to the
verification of that return, then you may find that the false and
fraudulent statements were false as to a material matter.
R.39.
These instructions were fully adequate as to the element of material falsity.
The instructions together with the indictment required the jury to determine whether
the amount of total income reported on Line 22 was false on the 1995 and 1996 tax
returns. Line 22 is undoubtedly a material matter. Such instructions more than
adequately encompass the element of material falsity. Cf. United States v. Fernandez,
282 F.3d 500, 509 (7th Cir. 2002) (declining to find plain error in jury instructions
which did not include instruction on materiality but, viewed in their entirety,
encompassed the concept of materiality). Both parties had ample opportunity to
argue how the facts of Ms. Pree's stock sales applied to the element of material
falsity.217
j.
True But Misleading Answers.
In United States v. Reynolds,218 the taxpayer skimmed money from a public project.
However, he elected to file a form 1040EZ which is supposed to be filed only by relatively low
income taxpayers. The 1040EZ requested information only for wages, salaries, tips and interest.
The taxpayer dutifully inserted all information requested on the return. The taxpayer did not include
the skimmed income because it fit none of the categories on the form. The question was whether
he could be prosecuted under 7206(1). The Governments theory was that by including only the
information requested on the form, he implicitly represented that he had no other income. The Court
responded:
The prosecutor's argument that by filing form 1040EZ a taxpayer implicitly
represents that he has no additional income has more substance, but this is not the
theory in the indictment. It charged that line 7, specifically, was false, and line 7 is
derived arithmetically from other lines. Section 7206(1) is a perjury statute, and
literal truth is a defense to perjury, even if the answer is highly misleading. Using
the wrong form does not violate 7206(1). If the form has an open-ended line
217
218
United States v. Pree, 408 F.3d 855 , 873 (7th Cir. 2005).
919 F.2d 435 (7th Cir. 1990).
- 116 -
calling for 61 income, and the taxpayer leaves some income out, 7206(1) applies.
Form 1040EZ is anything but open-ended, however. The right charges are tax
evasion (26 U.S.C. 7201) and failure to supply information required by law (26
U.S.C. 7203). Reynolds did not reveal his complete income ( 7203) and evaded
taxation on that income ( 7201). Neither the indictment nor the charge to the jury
set out the elements of these offenses, so the problem is deeper than a citation to the
wrong statute in the indictment. We vacate Reynolds' tax convictions, without
foreclosing indictment and trial for the offenses that match the prosecution's theory
of the case.219
I return later in the text to the issue of the literal truth defense to a charge of the false
statement crime in 18 U.S.C. 1001. I defer until then a discussion of the key Supreme Court case
Bronston v. United States, 409 U.S. 352 (1973), a nontax case -- establishing that, at least
generally, literal truth is a defense to a perjury charge under the general perjury statute, 18 U.S.C.
1621. (See discussion starting on p. 218.) Suffice it to say for this discussion of tax perjury that
the conventional wisdom asserted in the Reynolds quote above is that literal truth is a defense
to a perjury charge and, in this sense, the tax perjury statute is no different that the general perjury
statute.
In United States v. Pirro,220 the chairman of the board of a hospital center brought to Pirro's
attention some commercial property that, if purchased, could be leased to physicians affiliated with
the hospital. An S Corporation (Properties) purchased the building and leased it to another
corporation, apparently associated in some way with the hospital. Properties was owned 90% by
Pirro and 10% by another person. Properties received lease payments and paid some portion of the
lease payments to another corporation wholly owned by Pirro which, in turn, paid those amounts
to another corporation that was wholly owned by the chairman. S Corporation returns require the
disclosure of the stockholders of the S Corporation. On the S Corporation return for the year, Pirro
did not disclose that the chairman was a stockholder nor did he disclose any other ownership interest
of the chairman. The indictment charged that the chairman had acquired an ownership interest
in Properties, that Pirro failed to report that ownership interest, and that, by that failure, Pirro
violated 7206(1).
At trial Pirro moved to dismiss on the ground that the charge related to a requirement that
the law did not specify. In particular, the law requires that stockholders be identified but says
nothing about a person having an ownership interest which was the allegation in the indictment.
The district court dismissed the count.
Section 6037(a) requires that the return of an S corporation include the names and addresses
of all persons owning stock in the corporation . . . [and] the number of shares of stock owned by
each shareholder. . . . No other ownership interests are identified or required to be disclosed by the
statute or by the IRS form. (Of course, in a corporation, the classic paradigm is that all ownership
interests are nominated stock.) The Court held that there is no legal requirement that ownership
219
220
P. 437.
212 F.3d 86 (2d Cir. 2000).
- 117 -
interests be disclosed unless they are stock. Hence, Pirro could not have violated a known legal duty
in disclosing the two stockholders without further disclosing a non-stockholder having some
ownership interest which is the only allegation made in the indictment. In short, the tax law
provided Pirro no notice that failure to report an 'ownership interest' was criminal. Quoting from
other appellate decisions, the court distinguished a civil case from a criminal case as follows:
[C]riminal prosecutions are a different story. These must rest on a violation of a clear
rule of law . . . . If defendants [in a tax case] . . . could not have ascertained the legal
standards applicable to their conduct, criminal proceedings may not be used to define
and punish an alleged failure to conform to those standards. * * * *.
****
It is settled, this court observed in the analogous criminal tax case of
United States v. Critzer, that where the law is vague or highly debatable, a
defendant -- actually or imputedly lacks the requisite intent to violate it. 498 F.2d
1160, 1162 (4th Cir. 1974). Criminal prosecution for the violation of an unclear duty
itself violates the clear constitutional duty of the government to warn citizens
whether particular conduct is legal or illegal.
The Court of Appeals finally rejected the Government's attempt to rely upon cases such as
Ingredient Technology where the court, in a 7206(1) prosecution, declined to be bogged down by
the technicalities of ownership. The Court provided no analysis, and simply summarily concluded
that Ingredient Technology did not involve the situation before the Court.
Can you reconcile Pirro and Ingredient Technology?
The law of perjury in its usual context under 18 U.S.C. 1621 does not permit prosecution
for literally true but misleading answers at least in a judicial proceeding where the cross-examiner
can follow-through on misleading responses.221 Reynolds and Pirro are consistent with this general
concept in a document setting. Keep in mind in this regard that the IRS can fine tune its documents
to address the specific issues, thus laying the foundation for future 7206(1) prosecutions.
221
See Bronston v. United States, 409 U.S. 352 (1973), discussed below at p. 218. For
a variation on the stock ownership issue in a perjury-type setting, see United States v. Shotts, 145
F.3d 1289, 1299 (11th Cir. 1998), where the court treated the stock ownership question as, in
context, vague and held: Even if Shotts' answer [as to stock ownership] was evasive, nonresponsive, intentionally misleading and arguably false, it was literally true and cannot support a
conviction under Section 1623.
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C.
Aiding or Assisting False Return ( 7206(2)).

1.
The Statute.
Sec. 7206. Fraud and false statements

Any person who
*
*
*
(2) Aid or assistance. Willfully aids or assists in, or procures, counsels, or
advises the preparation or presentation under, or in connection with any matter
arising under, the internal revenue laws, of a return, affidavit, claim, or other
document, which is fraudulent or is false as to any material matter, whether or not
such falsity or fraud is with the knowledge or consent of the person authorized or
required to present such return, affidavit, claim, or document; * * * *
****
shall be guilty of a felony and, upon conviction thereof, shall be fined not more than
$100,000 ($500,000 in the case of a corporation), or imprisoned not more than 3
years, or both, together with the costs of prosecution.
2.
The Elements.
The Fifth Circuit Pattern Jury Instructions provide:

Title 26, United States Code, Section 7206(2), makes it a crime for anyone
willfully to aid or assist in the preparation under the internal revenue laws of a
document which is false or fraudulent as to any material matter.
First: That the defendant aided in [assisted in] [procured] [counseled]
[advised] the preparation [presentation] of a return [an affidavit] [a claim] arising
under [in connection with any matter arising under] the internal revenue laws;
Second: That this return [affidavit] [claim] falsely stated that _______ [state
material matters asserted, e.g., _______ received gross income of $_______ during
19__];
Third: That the defendant knew that the statement in the return [affidavit]
[claim] was false;
Fourth: That the false statement was material; and
Fifth: That the defendant aided in [assisted in] [procured] [counseled]
[advised] the preparation [presentation] of this false statement willfully, that is, with
intent to violate a known legal duty.
It is not necessary that the government prove that the falsity or fraud was with
the knowledge or consent of the person authorized or required to present such return
[claim] [affidavit] [document].
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A statement is material if it has a natural tendency to influence, or is

capable of influencing, the Internal Revenue Service in investigating or auditing a
tax return or in verifying or monitoring the reporting of income by a taxpayer.222
3.

a.
Not the Same as Aiding and Abetting.
This is the Internal Revenue Codes loose parallel to Title 18's aiding and abetting crime,223
but it is not the same. As we see in studying Title 18, the concept of aiding and abetting requires
that the person aided and abetted be guilty of a crime. One person alone cannot be guilty of Title
18's aiding and abetting crime without some criminal conduct of another. Section 7206(2) does not
require that the person whose taxes are reduced or affected have any knowledge of the proscribed
conduct. One person acting alone can be guilty of this crime.
b.
Willful Assistance.
This crime is designed to hit the person other than the taxpayer who assists in the preparation
of a false document (including a false return). The prototypical target of the provision is the tax
return preparer,224 but it can sweep much broader than tax return preparer. The statute has a broad
sweep, and makes all forms of willful assistance in preparing a false return an offense.225 The
statute thus covers tax shelter promoters who prepare false documents that appear to support a false
position taken on the return and preparers of Schedule K-1's or appraisals for tax issues (such as
charitable contributions) with false information that is then incorporated by innocent taxpayers on
their returns. United States v. Crum226 involved a tax shelter investment in beavers (that's right!).
The defendant, Crum, was the beaver raiser, normally a functionary in the overall arrangement
which had been devised by much more crafty people but Crum did participate in some of the
promotional activities and participated in backdating the contracts in order for the taxpayers to
appear to qualify for tax benefits to which they were not entitled. Crum argued that 7602 applied
only to tax return preparers. The court rejected the argument because the plain language of the
statute contained no such limitation.
c.
Document False as to a Material Matter.
The document must be false as to any material matter. The same materiality standards apply
as discussed above. There is no requirement as there is for 7206(1) that the defendant charged
have signed under penalty of perjury or even have signed any document at all.
222
Fifth Circuit Pattern Jury Instruction 2.98.

United States v. Williams, 644 F.2d 696, 701 (8th Cir. 1981), cert. denied, 454 U.S.
841 (1981). I discuss the general Title 18 aiding and abetting provision below beginning on p. 158.
224
United States v. Kelley, 105 F.2d 912 (2d Cir. 1939).
225
United States v. Hooks, 848 F.2d 785, 791 (7th Cir. 1988); see also United States v.
Coveney, 995 F.2d 578, 588 (5th Cir. 1993).
226
529 F.2d 1380 (9th Cir. 1976).
223
- 120 -
d.
Willfulness.
This same willfulness standards apply as discussed above.

e.
Preparation or Presentation.
The statute is obviously designed to criminalize and thereby discourage the presentation to
the IRS of false documents which impair its ability to administer the tax laws. For example, a
taxpayer or his accountant prepare a false invoice to justify an improper deduction and present the
invoice to the agent in an audit. The culpability within the scope of the statute includes also
preparation of false documents that are links in the chain of actual misinformation presented to the
IRS. For example, in a tax shelter promotion, a promoter may prepare false documents to support
the claims in a return, although the documents themselves are never actually presented to the IRS.
But consider whether a false return prepared by the taxpayer or an accountant that is never actually
presented to the IRS. Is the mere preparation of the return within the scope of the statute? The
Courts are split on that issue.227
D.
Tax Obstruction - Corruptly Impeding Tax Administration ( 7212's

Omnibus Clause).
1.
The Statute.
Sec. 7212. Attempts to interfere with administration of internal revenue laws

(a) Corrupt or forcible interference. Whoever corruptly or by force or threats
of force (including any threatening letter or communication) endeavors to intimidate
or impede any officer or employee of the United States acting in an official capacity
under this title, or in any other way corruptly or by force or threats of force
(including any threatening letter or communication) obstructs or impedes, or
endeavors to obstruct or impede, the due administration of this title, shall, upon
conviction thereof, be fined not more than $5,000, or imprisoned not more than 3
years, or both, except that if the offense is committed only by threats of force, the
person convicted thereof shall be fined not more than $3,000, or imprisoned not more
than 1 year, or both. The term threats of force, as used in this subsection, means
threats of bodily harm to the officer or employee of the United States or to a member
of his family.
Please focus on the bold face language. That language states one of the crimes under 7212 and
is commonly referred to as the Omnibus Clause for reasons which will become apparent. The first
227
See United States v. Joyner-Williams, 2011 U.S. App. LEXIS 24511 (7th Cir. 2011),
an unpublished opinion, the Seventh Circuit noted that it had interpreted the statute in the
conjunctive, requiring both preparation and presentation (or at least preparation alone would not do
it) but that other circuits had interpreted the case to permit the disjunctive. For statutory
interpretation enthusiasts, this raises the not uncommon issue of when disjunctive means the
conjunctive and the conjunctive means the disjunctive.
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part of the statute defines as a crime the threat or intimidation of an officer or an employee of the
U.S. acting in an official capacity under Title 26 (the Internal Revenue Code).228 Since it should be
obvious that such a threat or intimidation is criminal, I focus on the Omnibus Clause covering
conduct that is much more amorphous. Henceforth, when I refer to 7212 or use the term tax
obstruction, I am referring to 7212's Omnibus Clause unless I state otherwise.
2.
The Statutes Parentage - the Title 18 Obstruction Statutes.
Section 7212's Omnibus Clause is specific to tax administration, but Title 18 has analogs that
cover obstructive conduct. The most directly analogous is 18 U.S.C. 1505 which, in virtually the
same language as to key elements criminalizes obstructive conduct before Government agencies and
Congress. Technically, as to tax administration, obstructive conduct could be charged under either
7212 or 1505, but 7212, being the more specific provision, will be charged in tax cases rather
than 1505. From a defense standpoint, that is probably a good thing, since 7212's maximum
sentence is 3 years, whereas 1505's maximum sentence is 5 years.
Sections 7212 and 1505 derive from the general obstruction of justice statute in 18 U.S.C.
1503 which has been around longer and has been litigated far more than either of these two.229 The
key operative language (corruptly . . . .endeavors, etc.) is the same other than the target of the
obstruction (i.e., in the case of 1503 a judicial proceeding, whereas in the case of 7212 and
1505, an agency or Congress). Since, in a 7212 case the object of the alleged obstruction
228
The fact pattern presented in such cases offers virtually slam dunk convictions. See
e.g., United States v. Lovern, 293 F.3d 695 (4th Cir. 2002), cert. denied 537 U.S. 1058 (2002)
(holding that, although the district courts failure to submit the element of whether the allegedly
intimidated government officer was acting under Title 26 was error, it could apply the harmless error
analysis if the error is harmless beyond a reasonable doubt. (Citing Neder v. United States, 527
U.S. 1, 7 (1999) and its predecessor, United States v. Gaudin, 515 U.S. 506, 522-23 (1995), which
we discuss above beginning at p. 114.)
229
I discuss the history of these provisions in John A. Townsend, Is Making the IRS's
Job Harder Enough?, 9 Hous. & Bus. Tax L.J. 260 (2009). A predecessor to the portion of Section
7212 other than the Omnibus Clause was enacted in the Internal Revenue Service Act of 1864 which
made it a crime to forcibly obstruct or hinder any assessor or assistant assessor, or any collector or
deputy collector, revenue agent in inspector, in the execution of this act. Int. Rev. Service Act of
1864, ch. 173, 13 Stat. 238. This crime carried forward into the Internal Revenue Acts in the early
20th Century and codified into the first internal revenue code in 1939. Int. Rev. Code of 1939, ch.
34, section 3601(c)(1), 53 Stat. 436. Up to the 1954 Code, the crime only applied to actions against
IRS personnel. See United States v. Popkin, 943 F.2d 1535, 1543 (1991), cert. denied 502 U.S.
1004 (1992) (Roney, J., dissenting) (citing United States v. Walker, 514 F. Supp. 294, 304-05 (E.D.
La.1981) which, in turn, reviewed the legislative history. When codified into the 1954 Code, the
scope was expanded to include the Omnibus Clause language lifted from the Title 18 obstruction
analogs. The Senate Report accompanying the 1954 Code speaks only to the forcible obstruction
provision and does not speak to the Omnibus Clause that was added. United States v. Popkin, p.
1542, citing S. Rep. No. 1622, 83rd Cong., 2d Sess. 1954, reprinted in [1954] U.S. Code Cong. &
Admin. News 4621, 5254.
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(administration of the tax laws) is usually apparent and not contested, the other operative language
common to these statutes becomes the battleground. Courts thus most frequently look to 1503 for
guidance.230
These specific obstruction provisions should not obscure the fact that the web of provisions
dealt with in this course really are all about obstruction. Tax evasion is a particular form of
obstruction, as is tax perjury, aiding and assisting, etc. These other provisions, however, have more
specific elements that limit their application in a way that the language of 7212 would not seem
to be limited. Specifically, one that is obvious is that other key element of tax crimes willfulness
which we discussed above. That element is missing from the text of 7212. I discuss below what
that might mean, if anything.
Finally, 7212 has a symbiotic relationship with the defraud conspiracy in 18 U.S.C. 371,
which in a tax setting is called a Klein conspiracy (after the leading case).231 Although the language
of the statutes differ, the Klein conspiracy is interpreted to cover conduct impairing or impeding tax
administration and thus, as interpreted, covers the same type of conduct as 7212. Thus, 7212
might be considered a one-person Klein conspiracy.
3.
The Elements.
I focus here on the elements of the Tax Codes Omnibus Clause. Parsing that language of
7212, the Omnibus clause felonizes conduct that in any other way corruptly * * * obstructs or
impedes, or endeavors to obstruct or impede, the due administration of this title.
There is no Fifth Circuit pattern jury instruction for 7212. I accordingly use here the
pattern jury instruction contained in the CTM.232
Count __________ of the indictment charges the defendant with violating 26 U.S.C.
7212(a). That statute makes it a crime for anyone to corruptly obstruct or impede,
or endeavor to obstruct or impede, the due administration of the Internal Revenue
laws.
230
DOJ CTM 17.04[2] (2008 ed.) (citing United States v. Williams, 644 F.2d 696,
700-01 & n. 11 (8th Cir.), cert. denied, 454 U.S. 841 (1981); and United States v. Martin, 747 F.2d
1404, 1409 (11th Cir. 1984)). Title 18 obstruction is discussed below at p. 244.
231
The Klein conspiracy is named after the leading defraud conspiracy case in a tax
setting. United States v. Klein, 247 F.2d 908 (2d Cir. 1957), cert. denied 355 U.S. 924 (1958). In
a prior version of the CTM, DOJ Tax asserted that tax obstruction may be charged where the Klein
conspiracy is unavailable due to insufficient evidence of conspiracy. CTM 17.02 (2001 ed.). The
2008 version of the general subject is in 17.00 and refers to Directive 129 which superseded
Directive 77. The language quoted in the text from the 2001 version incorporating Directive 77 is
omitted from the superseding Directive 129. I don't think that omission is a concession of the point,
however.
232
CTM (2008 ed.), Jury Instructions - Title 26 Offenses, 26 U.S.C. 7212(a) (Omnibus
Clause). I have pieced these together from 26.7212(a)-1, -2, -4, and -6.
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In order for you to find the defendant guilty of this charge, the Government must
prove each of the following elements beyond a reasonable doubt:
First: The defendant in any way corruptly;
Second: Endeavored to;
Third: Obstruct or impede the due administration of the Internal Revenue Laws.
To act corruptly is to act with the intent to secure an unlawful advantage or benefit
either for oneself or for another.
An endeavor is any effort or any act or attempt to effectuate an arrangement or to try
to do something, the natural and probable consequences of which is to obstruct or
impede the due administration of the Internal Revenue Laws.
To "obstruct or impede" is to hinder or prevent from progress, check, stop, also to
retard the progress of, make accomplishment difficult and slow.
4.

a.
Brief Comments on the Elements.

(1)
Corrupt Conduct.
The statutory term is corruptly endeavors. Perhaps the most common statement of this
element, parroted in the foregoing CTM instruction, is:
Corruptly in the context of section 7212(a) means to act with the intent to secure
an unlawful advantage or benefit either for oneself or another.233
This broad reading is based on the statutory phrase in any other way. There is no explicit
requirement of evil or criminal intent. Perhaps evil at least criminal intent is implicit in the
concept of corruptly which is paraphrased in the above quote as unlawful benefit or advantage.
Certainly acting with an intent to obtain something unlawful meets mens rea notions that permeate
our criminal laws and, if the actor intends something that he or she knows is unlawful, something
like willfulness the common element for other tax crimes is required. But, the Governments
claims for 7212 and some courts language in discussing 7212 at least suggest that 7212
criminalizes any conduct that simply is intended to make the IRSs job harder.
233
CTM 17.04[1] (2008 ed.), citing United States v. Winchell, 129 F.3d 1093, 1098
(10th Cir. 1997) and United States v. Reeves, 752 F.2d 995, 998 (5th Cir. 1985), cert. denied, 474
U.S. 834 (1985) (cited with approval in United States v. Popkin, 943 F.2d 1535, 1540 (11th Cir.
1991), cert. denied, 112 S. Ct. 1760 (1992).
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The Government made that type of claim in United States v. Caldwell, 989 F.2d 1056, 1058
(9th Cir. 1993) for the scope of the Klein conspiracy which, as interpreted covers the same conduct
as 7212 except for the Klein conspiracys requirement of multiple actors with a joint
undertaking.234 In Caldwell, Judge Kozinski rejected the claim in the Klein conspiracy setting, and
I think it should be rejected for the 7212 counterpart also. The mechanism that similarly limits
7212 is the corruptly element. There are myriads of actions that taxpayers and their
representatives do every day with the intent to influence an investigation by making the IRSs job
harder. Corruptly means something far worse than merely intentional conduct. The precise
contours of the dividing line may necessarily uncertain, but as in Caldwell it can be recognized, and
the Governments expansive claims reigned in.235
A Key CTM Tax Directive gives examples of the type of corrupt conduct criminalized as
follows (emphasis supplied):
A 7212(a) omnibus clause charge is particularly appropriate for corrupt conduct
that is intended to impede an IRS audit or investigation. Examples of such conduct
include, but are not limited to, providing false information, destroying evidence,
attempting to influence a witness to give false testimony, and harassing an IRS
employee.
A 7212(a) omnibus clause charge can also be authorized in appropriate
circumstances to prosecute a person who, prior to any audit or investigation, engaged
in large-scale obstructive conduct involving the tax liability of third parties.
Examples include, but are not limited to, assisting in preparing or filing a large
number of fraudulent returns or other tax forms, or engaging in other corrupt
conduct designed to obstruct the IRS from carrying out its lawful functions.236
These examples give the flavor that some mere intent to make the IRS less efficient than it
might otherwise be is not enough. Indeed, when the Government attempts to assert otherwise in the
analogous general obstructions crimes, courts hammer reject that notion. Indeed, when the
Government cites cases that it claims suggest that, you will find that they really do not stand for the
proposition the Government claims. Lets look at the CTM which lists more examples.237 All
except two of these examples facially establish the corrupt element as presented in the CTM. Those
two examples, as stated, might lead one to believe that something really corrupt is not required (I
give the quote and then discuss why they are misleading in this respect):
234
This is a paraphrase of the Judge Kozinskis formulation of the claim for the Klein
conspiracy, which as noted above in the text is analogous in its interpretation to 7212. United
States v. Caldwell, 989 F.2d 1056, 1058 (9th Cir. 1993).
235
I discuss my interpretation of 7212 highly summarized above in John A. Townsend,
Is Making the IRS's Job Harder Enough?, 9 Hous. & Bus. Tax L.J. 260 (2009).
236
CTM 3.00 (2008 ed.), Directive No. 129 (October 2004).
237
CTM 17.04[1] (2008 ed.).
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Making statements, whether threats or not, designed to persuade witnesses not

to talk to IRS employees or cooperate with an IRS investigation. I dont think that
on these bare words, any criminal conduct is made here. I refer the reader to cases
which hold, for Title 18 obstruction, corruptly persuades would not include such
conduct. See United States v. Doss, 630 F.3d 1181 (9th Cir. 2011) (discussing a
circuit split, but citing prominently Arthur Andersen LLP v. United States, 544 U.S.
696 (2005).238 Corruptly means something other than intentional.
Attempting to interfere with an auction of property to pay a tax debt, by filing a
lis pendens action and distributing copies of the notice to prospective buyers. The
case cited in the CTM for this proposition makes clear that the claim supporting the
lis pendens was spurious and thereby intended to obtain an unlawful benefit. The
case does not suggest that a defendant filing a lis pendens to support a valid or
colorably valid claim is committing a criminal act even if he intended thereby to
impede the IRSs sale of the property.
The unlawful benefit sought need not be financial. For example, the filing of false 1099s to
harass perceived enemies would be an unlawful advantage.239 And, the targets need not be IRS
employees or officials, since false 1099 or other tax reports related to other taxpayers are equally
disruptive of tax administration.
(2)
Endeavoring.
The jury instruction definition above adequately describes the endeavoring element.240
Endeavoring connotes somewhat the same notion as attempts in 7201. There must be
affirmative action taken.
In the pattern instructions quoted above, materiality is not stated as an element of the crime
or a limitation on the scope of the crime. As I note elsewhere, however, 7212(a)s omnibus clause
drawn from similar omnibus clauses in 18 U.S.C. 1505 and the original antecedent in 18 U.S.C.
1503, the general obstruction of justice statute. The operative language is very close to the same.
The general Title 18 obstruction statutes are interpreted to require that the endeavor must have the
238
The case cited by the CTM, United States v. Valenti, 121 F.3d 327, 331-32 (7th Cir.
1997), predates Andersen. Moreover, the Valenti panel said that the conduct was with an intent to
secure and unlawful benefit and the facts cited by the panel clearly evince something far more
recognizably corrupt than the bare words of the CTM suggest.
239
United States v. Yagow, 953 F.2d 423, 427 (8th Cir. 1992), relying on the Fifth
Circuits opinions in United States v. Reeves (Reeves I), 752 F.2d 995, 998 (5th Cir. 1985), cert.
denied, 474 U.S. 834 (1985); United States v. Reeves, 782 F.2d 1323, 1325-26 (5th Cir. 1986), cert.
denied, 479 U.S. 837 (1986); see also United States v. Dykstra, 991 F.2d 450, 453 (8th Cir. 1993),
cert. denied, 114 S. Ct. 222 (1993).
240
For an approved jury instruction on endeavor similar to the one above, see United
States v. Kelly, 147 F.3d 172, 177 (2d Cir. 1998).
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natural and probable effect of interfering with the due administration of justice.241 Thus, materiality
arguably is an implicit element of 1503242 and should, logically, be an implicit element of
7212(a).
(3)
Obstructing or Impeding.
The defendant must have taken the action with the intent to impede. The actions need not
have succeeded.243
b.
Background.
The expansive use of the Omnibus Clause (references here are to the Tax Code
Omnibus Clause unless otherwise specifically noted) has been a matter of discussion for some time
now.244 The provision was initially enacted by Congress to deal with improper attempts to influence
IRS investigations. The first part of subsection (a) deals with specific threats against IRS agents,
and should not detain us here since we all know that is both wrong and unlawful. The language of
the Omnibus Clause, however, is capable of broad and uncertain construction. What is corrupt
conduct? Since the statute doesnt tell us what that is, is it like pornography so that well know it
when we see it?
Until fairly recently, the Government rarely used the Omnibus Clause because there were
more focused crimes for the types of conduct that have historically concerned the Government.
Thus, for example, if the taxpayer failed to maintain records so that the IRS would be hampered in
its ability to audit, the Government could still bring a tax evasion charge under 7201. When the
Government somewhat belatedly saw the Omnibus Clause as an opportunity to expand the scope
of its criminal enforcement weapons, it explained its earlier inaction as timid.245
241
United States v. Aguilar, 515 U.S. 593, 509 & 601 (1995).
United States v. Thomas, 612 F.3d 1107, 1128-29 (9th Cir. 2010). I present this
argument in summary (but more detail and with citations) in John A. Townsend, Tax Obstruction
Crimes: Is Making the IRS's Job Harder Enough, 9 Hous. Bus. & Tax. L.J. 255, 356-7 (2009).
243
United States v. Rosnow, 977 F.2d 399 (8th Cir. 1992), cert. denied sub nom. Dewey
v. United States, 507 U.S. 990 (1993).
244
See e.g., Kathryn Kenneally, White Collar Crime: Ill-advised Government Theories,
23 Champion 68 (1999).
245
In United States v. Williams, 644 F.3d 686, 699 (8th Cir. 1981), the Court said:
Our research, however, has disclosed no case brought by the Government under the
more general omnibus clause of section 7212. We note, therefore, that the proper
interpretation of this clause presents us with an issue of first impression, and that we
proceed cautiously where for over twenty-five years the Government has feared to
tread.
At one time the Government contended that 7212 applied only to conduct
involving force or threats of force. See United States v. Henderson, 386 F. Supp.
1048, 1055-56 (S.D.N.Y.1974). The Government in the present case has
characterized its position in Henderson as timid.
242
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DOJs Deputy Assistant Attorney General for DOJ Tax and a prominent practitioner recently
squared off over the issue:
Tax obstruction cases under 7212 have been increasing, Matthews said, but
account for less than 5 percent of the cases. I guess comparing where we were a few
years ago, I guess you could call it an epidemic, he said.
The reason why the government is using that statute more is because it really
allows us to tell us a story in the indictment, particularly when we face fact patterns
where they're long and detailed, complicated courses of conduct, particularly if
they're multiple years, conduct that doesn't neatly fall into tax years, Matthews said.
The children at the IRS found a new toy to play with in using Section 7212,
said Robert S. Fink, with Kostelanetz & Fink, New York.
The government is using Section 7212 in a way that the section was not
intended to be used, Fink said. The most visible Section 7212 case involved National
Basketball Association referees, including one who was charged with cashing in a
first class ticket for a coach class ticket and pocketing the difference, he said.246
c.
Relationship to More Specific Crimes.
DOJ Taxs CTM states:

The omnibus clause should not be used as a substitute for a charge directly related
to tax liability such as tax evasion or filing a false tax return if such a charge is
readily provable. Alleging and proving an actual or intended tax loss may result in
an enhanced sentence and may estop a target from contesting application of a civil
fraud penalty.
The fact that conduct that violated 7212(a) was in furtherance of a preexisting
criminal scheme for example, an ongoing conspiracy or a continuing attempt to
evade taxes does not preclude prosecution under 7212(a). Targets who first
commit primary tax crimes and then engage in conduct designed to obstruct the IRS
can be held accountable for the obstruction and punished more severely than those
who do not engage in additional criminal conduct.
When the obstruction involves a grand jury investigation, obstruction of justice or
perjury charges (e.g., 18 U.S.C. 1510, 1512 or 1623) that more specifically address
the conduct are preferable to 7212(a) charges.247
246
Level of Criminal Tax Fraud Cases Leveling Off, Justice Department Official Says,
1998 DTR 45 d6 (3/9/98).
247
CTM 3.00 (2008 ed.), Directive No. 129.
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In United States v. Kelly,248 the taxpayer, an attorney and experienced businessman,

negotiated an agreement upon leaving the employment of a corporation to be paid consulting fees
aggregating $244,200 over an 18 month period. The corporation actually paid these earlier than the
consulting services were to commence, and treated them as earned by the taxpayer by the time of
payment. It appeared that there would really be no consulting going on. After receiving the
payments, the taxpayer then entered an agreement with his corporation, Condor, assigning to
Condor the duties under the agreement with the first corporation and the right to the fees under the
first contract. By then, as noted, the taxpayer had already received the fees, and there were no real
duties under the contract. The taxpayer then wrote the first corporation and asked that all tax
reporting forms with respect to the transaction be issued to Condor. The first corporation refused
and issued a Form 1099 to the taxpayer. The taxpayer reported the receipts on his Schedule C, but
zeroed that reporting out with a deduction in an equivalent amount and noted that he had assigned
the income to Condor.
In an ensuing audit, the taxpayer met with the agent twice. In the first meeting, the taxpayer
advised that he had deducted the item because it had been assigned to Condor and gave the agent
copies of the two agreements. The taxpayer also represented that Condor had filed no tax return for
the year. In the second meeting, the taxpayer took the same position as to the reason for deducting
the item, but advised the agent this time that Condor picked up the income, which is common
parlance for, and the agent took it to mean, that Condor had reported the income on its tax return.
The agent thereafter determined that Condor had in fact filed no tax return. The agent also
subsequently determined that the taxpayer had not in fact actually transferred any of the monies to
Condor. The agent determined that the contractual arrangement between the taxpayer and Condor
was a sham.
The Government then indicted the taxpayer under 7206(1) for making a false individual
return omitting the income and under 7212(a)'s Omnibus Clause for providing the agent a false
and fraudulent assignment agreement. Kelly was acquitted of the 7206(1) charge, but convicted
of the 7212(a) Omnibus Clause charge. Kelly argued on appeal that the Omnibus Clause required
actual threats or injury to an IRS agent, but the Court handily rejected that argument on the basis of
the plain language of the Omnibus Clause which is not so limited. The Court then moved to Kelly's
other arguments as to the Omnibus Clause:
Kelly next contends that the district court's decision to charge him under
section 7212(a) violated a policy statement issued by the Tax Division of the
Department of Justice. That directive instructs officers of the Department not to
utilize the omnibus clause of section 7212(a) where other more specific charges are
available and adequately reflect the gravamen of the offense. Kelly argues that
there was a more specific and appropriate charge available to the Government in his
case, namely tax evasion under section 7201, and that the Government should have
prosecuted him under that statute rather than section 7212(a). We are not persuaded
by this contention. As a general rule, non-compliance with internal departmental
guidelines is not, of itself, a ground of which defendants can complain. * * * *.
248
147 F.3d 172 (2d Cir. 1998).
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Such guidelines provide no substantive rights to criminal defendants. * * * *.

Moreover, the record does not support Kelly's claim of non-compliance.
Kelly characterizes his actions as garden variety tax evasion rather than
obstruction. We disagree. Kelly's delivery of the Condor assignment agreement to
Marcantonio [the IRS agent] did more than merely further a tax evasion scheme -it was designed to impede Marcantonio from uncovering a tax evasion scheme that
already had been effectuated. It expanded and delayed the progress of Marcantonio's
audit and investigation and thus can be characterized accurately as obstruction, rather
than evasion.
Kelly suggests the district court's broad interpretation of the statute
potentially could run afoul of the constitutional doctrines of overbreadth and
vagueness. In support of his position, Kelly cites United States v. Poindexter in
which the court held, over the strong dissent of Judge Mikva, that use of the term
corrupt in the more general obstruction-of-proceedings statute, 18 U.S.C. 1505
[Obstruction of proceedings before departments, agencies and committees], rendered
that statute unconstitutionally vague as applied. However, five other circuits have
upheld the constitutionality of section 7212(a) in the face of claims similar to that
presently posed by Kelly. These decisions are cited and discussed in the
well-reasoned opinion of District Judge Gertner in United States v. Brennick, 908 F.
Supp. 1004, 1010-13 (D. Mass. 1995). Finding the analyses in these opinions both
pertinent and persuasive, we reach the same result.
We also reject Kelly's contention that willfulness is a necessary element of
section 7212(a) and that the district court should have instructed the jury
accordingly. In making this argument, Kelly relies upon Cheek v. United States
which involved 26 U.S.C. 7201 and 7203. Unlike section 7212(a), both of these
sections specifically require proof of willfulness. There is no single, universal
definition of the word willfully. [citing Pomponio and Murdock] Usually,
however, the varying definitions contain certain common general elements. When,
as here, a court properly instructs a jury concerning these elements, it need not usurp
the function of Congress by inserting the term willfully in a statute where Congress
saw fit to omit it.
The key words in section 7212(a) are corruptly and endeavors. * * * *.
The district court instructed the jury that
To act corruptly is to act with the intent to secure an unlawful
advantage or benefit either for one's self or for another.
This is a well-accepted definition of the term corruptly when used in this
context. See * * * *. The district court then defined endeavors as follows:
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It means to knowingly and intentionally act or to knowingly

and intentionally make any effort which has a reasonable tendency to
bring about the desired result.
****
A person acts knowingly if he acts intentionally and
voluntarily and not because of ignorance, mistake, accident or
carelessness.
****
Before you can find that the defendant acted intentionally, you must be
satisfied beyond a reasonable doubt that the defendant acted deliberately and
purposefully, that is, defendant's acts must have been the product of the defendant's
conscious objective rather than the product of mistake or accident.
The district court's definition of the proof required for the section 7212(a)
violation was as comprehensive and accurate as if the word willfully was
incorporated in the statute. * * * *. We are reluctant, therefore, to add the word
willfully to section 7212(a), where Congress has seen fit to omit it. * * * *.
----------- [End of Kelly Case]
Consider the following questions with respect to Kelly (some of this is review):
Could Kelly's conduct have supported a charge and a conviction under 7201? It
is true that, for some unarticulated reason, the jury acquitted under 7206(1) which would suggest
that it might have also acquitted under 7201. But, just focusing on the facts of this case (and
setting aside any concern about what the jury did), do the facts support a charge under 7201 that
would stand up if the jury convicted? In thinking of your answer, consider the following:
a.
Would the creation of the agreement with Condor have met the
requirement of an affirmative act? See Spies.
b.
Would the mere filing of the return zeroing out the income based on
a sham agreement meet the requirement for an affirmative act, particularly if (as
occurred) the taxpayer disclosed the zeroing out? Also see Spies.
c.
Was the statement to the agent that Condor had picked up the
payments an act of tax evasion or possibly at least refreshed the statute of limitations
as in Beacon Brass?
Considering the answers to the foregoing questions, did the Government have an
option as to which statutes to charge Kelly? Could it have charged Kelly with both 7201 and
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7212? (I do not expect you to be able to come up with a comfortable answer to these questions
based on the materials that have preceded; but I do want you to at least recognize the possible issues;
I return to a subset of the issue in considering the concept of the lesser included offense.) But what
I want you to think of here is why the Government did not charge under 7201. Can you articulate
some reasons based on the previous materials?
It is true that 7212(a) does not textually require that the person act willfully.
However, it does require that the taxpayer act "corruptly." Does the concept of willfulness inhere
in the requirement that the person act corruptly as the court said in Kelly (corruptly and
endeavors are as comprehensive and accurate as if the word willfully was incorporated in the
statute [ 7212].?
Let me develop this last thought through two related examples. Assume a taxpayer takes an
aggressive position on a nontax shelter item that has substantial authority. Because substantial
authority means that the taxpayer believes the position more likely than not will not prevail if
audited and litigated, the taxpayer effects the transaction through a grantor trust which, the taxpayer
thinks, will decrease the chances of detection by the IRS. The underlying position is not illegal;
indeed, Congress has said that the taxpayer can even report that position without even a civil
penalty. The interjection of a grantor trust to exploit the perceived IRS inefficiencies in the
administration of the tax laws should not be corrupt and not subject to prosecution under Section
7212.
Assume instead that the position is frivolous and the taxpayer knows that claiming the
benefit of the position would violate a known legal duty. The taxpayer nevertheless reports the
position and uses a grantor trust to lower the audit profile. In that context, it would seem to me that
using the grantor trust would be subject to prosecution under Section 7212, as well under Sections
7201 or 7206(1) for the underlying substantive offense .
The difference between the two examples is that the Government would have to prove for
the substantive offense of evasion or tax perjury that taxpayer acted willfully and for the tax
obstruction offense the same thing -- the criminal conduct establishing the corruptness and the intent
to obstruct with respect to criminal conduct (as opposed to noncriminal conduct).
I think that is the right analysis for the example posited. To be sure, there are myriad
variations which might, at the margins, present the issue of whether tax obstruction could apply
where there is no consciousness of illegality. I think that is probably dancing on the head of a pin
to figure those out. Note in this regard that the CTM states with apparent approval:
Section 7212(a) does not include any language requiring that the defendant
acted willfully. The Second Circuit has upheld a district courts refusal to give a
Cheek willfulness instruction, noting that Section 7212(a) does not include that term
and opining that the district court's instructions as to corruptly and endeavors
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were as comprehensive and accurate as if the word willfully was incorporated in

the statute. United States v. Kelly, 147 F.3d 172, 177 (2d Cir. 1998).249
I will refer back to this example when discussing the other significant obstruction crime, the
Klein / defraud conspiracy below.
d.
Post Filing Conduct Only?
The key obstruction provision from which 7212(a) derives requires a pending proceeding?
Does 7212(a) require a pending proceeding?
In United States v. Kassouf,250 tucked away in a 26-count indictment, was a count that
alleged the defendant violated the 7212(a) Omnibus Clause by (i) conducting partnerships and
their corporate general partners in a way that would make audit more difficult to trace his activities
and (ii) misleading the IRS by filing tax returns that did not disclose the transactions and income
earned with respect to them. Note that the act of filing false tax returns would be crimes under the
provisions discussed above ( 7201, 7206(1) and 7206(2), depending upon context). The issue
raised by the use of the Omnibus Clause is what does it add, if anything?
At the trial level and on appeal, the defendant made several allegations with respect to the
Omnibus Clause. He alleged that the Government's allegations failed to state a violation of the
Omnibus Clause, that the Omnibus Clause, if interpreted to state a crime in this case, was
unconstitutional, and that the statute of limitations upon prosecution had expired. The trial court
dismissed the count on the basis that the Omnibus Clause required a pending IRS proceeding or
investigation that was impeded or obstructed. The Government appealed.
The issue as framed to the Court of Appeals was whether the Omnibus Clause required a
pending IRS investigation or proceeding that the taxpayer's conduct was intended to affect. The
Court looked at the statute. The Court found the language inconclusive on the issue presented. The
Court then looked to the interpretation of 18 U.S.C. 1503 which has an Omnibus Clause in almost
identical language with respect to obstruction of the due administration of justice. That provision
has been interpreted to require a pending judicial proceeding and that the defendant be aware of the
judicial proceeding; that provision does not apply to antecedent acts even if they are designed to
affect an ultimate judicial proceeding. The Court found the authority so limiting 18 U.S.C. 1503
instructive, and specifically declined to accept the Fifth Circuit's suggestion in United States v.
Reeves251 that the tax Code Omnibus Clause was broader than the 18 U.S.C. 1503's Omnibus
Clause. The Court then reasoned:
Here, were we to permit the allegations in Count 26 to stand, we would be
imposing liability for conduct with even less of a causal connection than that rejected
by the Supreme Court in Aguilar. We would be permitting the IRS to impose
249
250
251
CTM 17.04 (2008 ed.).

144 F.3d 952 (6th Cir. 1998).
752 F.2d 995 (5th Cir. 1985).
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liability for conduct which was legal (such as failure to maintain records) and
occurred long before an IRS audit, or even a tax return was filed. The speculative
nature of this obstructive conduct is readily apparent, and we agree with the district
court that the statute cannot be construed to prohibit it. Because Title 26
encompasses such routine actions as even the government points out, imposing
liability for actions committed before a person knew of an investigation or
proceeding, would open them up to a host of potential liability of conduct that is not
specifically proscribed.
In construing 7212(a) to require a pending IRS action under the code of
which the defendant is aware, we are also mindful that courts should interpret
statutes that impose criminal liability narrowly to ensure proper notice to the
accused. In this day, when Congress is attempting to curb the reach of the IRS into
the homes of taxpayers, we cannot construe a penal law such as 7212(a) to permit
such an invasion into the activities of law-abiding citizens. As the district court
noted, out of the hundreds of people who file taxes every day, there is no guarantee
that a particular tax return will be audited. Therefore, it would be highly speculative
to find conduct such as the destruction of records, which might or might not be
needed, in an audit which might or might not ever occur, is sufficient to make out an
omnibus clause violation. Were the court to find otherwise, we would be opening
the statute to legitimate charges of overbreadth and vagueness, particularly where the
statute may impose liability for otherwise lawful conduct. Kassouf may have had no
idea that conduct such as the failing to maintain records (before his tax returns were
ever filed) might obstruct IRS action because he had no specific knowledge that the
IRS would ever investigate his activities. If upon hearing that the IRS was
conducting an audit of his returns, however, Kassouf had begun destroying records
and funneling money through various accounts to prevent detection of his illegal
activities, 7212(a) would clearly apply.
Thus the majority concluded that the Omnibus Clause did not support a charge for activity when
there was no pending investigation. The minority judge on the three-court panel saw things
differently, reasoning from the similar but not same language of 18 U.S.C. 1503 as follows:
As noted by the majority, however, courts must presume that Congress knew
of the prevailing law when it enacted a statute. Section 1503 was in effect long
before 7212(a) and the due administration of justice wording of 1503 has
consistently been construed to require affected judicial proceedings. It is only
logical, therefore, to conclude that if Congress wished 26 U.S.C. 7212(a) to be
interpreted in an identical fashion, identical language would have been inserted into
that statute.
In its wisdom, our nation's legislative body chose, however, to distinguish the
requirements of the statutes by use of broader language in 7212(a). Pursuant to
those provisions, it is not only the administration of justice that is protected from
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undue obstruction, but the very administration of the myriad duties performed under
the Title.
The majority unnecessarily sounds the alarm that such a reading of the plain
language of the statute will result in criminal prosecutions of individuals who may,
for example, innocently dispose of old tax returns and records later requested by the
Internal Revenue Service for audit purposes. In light of recent revelations of abuses
perpetrated by employees of the Internal Revenue Service, such concern is
understandable. The comforting fact remains, however, that the statute itself still
requires that any obstruction of the due administration of Title 26 be accomplished
by means of corruption, force, or threats of force. If the courts of our land remain
vigilant and scrupulously require government prosecutors to toe the well-defined line
drawn by Congress in this legislation, I am confident the majority's fears will be
allayed.
Although no federal court of appeals appears to have addressed directly the
precise issue now before us, every sister circuit that has examined the reach of 26
U.S.C. 7212(a) has accepted the principle that the provisions of that subsection do
not require the government to prove the existence of an ongoing or pending tax
investigation or proceeding. I see no reason for us now to rush into the breach to
create an analytical split on this question. I would REVERSE the district court's
dismissal of Count 26 of the indictment and REMAND this matter for further
proceedings as necessary.
In United States v. Bowman,252 the Sixth Circuit recognized that Kassouf may have painted
with too broad a stroke in limiting the application of 7212 to just instances of a pending IRS
investigation. In that case, Bowman engaged in an elaborate scheme whereby he sent false IRS
forms 1099 to various financial institutions and individuals whom he felt had wronged him. The
false 1099's indicated that those financial institutions and businesses had cancellation of
indebtedness income. Bowman also filed a Form 1096 with the IRS which summarized the
information in the Forms 1099 he had sent. The question presented was whether this conduct could
be subject to prosecution under the omnibus clause. Specifically, relying upon Kassouf, Bowman
argued that, since there was no pending IRS investigation, he could not be prosecuted under that
provision. The Sixth Circuit in Bowman limited Kassouf to its facts, reasoning:
In determining whether Bowman's conduct violated the omnibus clause, this
Court must evaluate the impact of Bowman's activities on the execution of the duties
of the IRS. Bowman willfully and knowingly filed false information on his 1099 and
1096 forms, and these filings had a direct impact on the administration of this
agency's duties. Moreover, the obvious purpose of his actions was to harass his
creditors.
252
173 F.3d 595 (6th Cir. 1999).
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We hold that Kassouf must be limited to its precise holding and facts, and
that it cannot be read to encompass the kind of activity for which Bowman was
indicted. All of the reasoning in Kassouf supports the conclusion that an individual's
deliberate filing of false forms with the IRS specifically for the purpose of causing
the IRS to initiate action against a taxpayer is encompassed within 7212(a)'s
proscribed conduct. The filing of false tax forms is not legal when undertaken; it is
not speculative; it is specifically designed to cause a particular action on the part of
the IRS. The action it is designed to cause is not routine; rather, the intended action
is one that, but for the false filing, would not be undertaken at all relative to the
victimized taxpayers. Finally, unless Kassouf is limited to its facts, its effect would
be to prevent the prosecution of actions whose sole purpose is to obstruct or impede
the IRS in the administration of its duties, as those acts of obstruction only trigger
or attempt to trigger investigations by the IRS. Prosecution of such acts does not
offend the goal of Kassouf: In this day, when Congress is attempting to curb the
reach of the IRS into the homes of taxpayers, we cannot construe a penal law such
as 7212(a) to permit such an invasion into the activities of lawabiding citizens.
Kassouf, 144 F.3d at 958. Indeed, to preclude the prosecution of such acts may tend
to proliferate the very invasion Kassouf sought to prevent, but the lawabiding
citizens whose homes will be invaded would be those of the hapless victims of
Bowman and his ilk. Therefore, we conclude that Bowman's activities are proscribed
by 7212(a).
Query: Does Bowman really limit Kassouf in those cases where there really is a more
specific tax crime such as 7201 and 7206(1)?
5.
Synthesis.
In 1999 some thoughtful practitioners attempted to synthesize the cases under the Omnibus
Clause into a workable framework for analysis.253 I offer here that synthesis in the form of
categories of the cases up to that time:
1.
Action directly targeted at impeding or harassing an IRS employee.254
2.
Fraudulent activity in connection with an ongoing audit, collection or
investigative proceeding by the IRS.255
253
David F. Axelrod, Larry A. Campagna, James A. Bruton III, The New Tax Laws
- 26 U.S.C. Section 7212(a) and the One-Person Conspiracy (Paper prepared for ABA National
Institute on Criminal Tax Fraud in 1999).
254
The authors cite United States v. Martin, 747 F.2d 1404 (11th Cir. 1984), and United
States v. Dykstra, 991 F.2d 450 (8th Cir.), cert. denied, 510 U.S. 880 (1993).
255
The authors cite United States v. Bostian, 59 F.3d 474 (4th Cir. 1995), cert. denied,
516 U.S. 1121 (1996) (involving lis pendens on property subject to IRS seizure and sale); United
States v. Shriver, 967 F.2d 572 (11th Cir. 1992) (transfer of property immediately before filing of
tax lien and then stamping void notice on the filed tax lien).
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3.
Causing administrative action by the IRS with the intent to harass or gain an
advantage over a third party.256
4.
Establishing a scheme to avoid the payment of taxes.257
I invite readers to consider whether this synthesis into categories is consistent with the foregoing
presentation, particularly the discussion of the Corruptly element of the Omnibus Clause.
Specifically, are the categories simply the categories at the time or is the law, particularly the
Omnibus element interpretation, consistent with applying the Omnibus Clause to even more
categories?258
E.
Failure to File, Keep Records, Supply Information or Pay Tax ( 7203).

1.
The Statute.
Sec. 7203. Willful failure to file return, supply information, or pay tax
Any person required under this title to pay any estimated tax or tax, or
required by this title or by regulations made under authority thereof to make a return,
keep any records, or supply any information, who willfully fails to pay such
estimated tax or tax, make such return, keep such records, or supply such
information, at the time or times required by law or regulations, shall, in addition to
other penalties provided by law, be guilty of a misdemeanor and, upon conviction
thereof, shall be fined not more than $25,000 ($100,000 in the case of a corporation),
or imprisoned not more than 1 year, or both, together with the costs of prosecution.
In the case of any person with respect to whom there is a failure to pay any estimated
tax, this section shall not apply to such person with respect to such failure if there is
no addition to tax under section 6654 or 6655 with respect to such failure. In the
case of a willful violation of any provision of section 6050I, the first sentence of this
section shall be applied by substituting felony for misdemeanor and 5 years
for 1 year.
256
The authors cite United States v. Van Kriken, 39 F.3d 227 (9th Cir. 1994), cert.
denied, 514 U.S. 1075 (1995) (who filed numerous and groundless Forms 1099); and United States
v. Rosnow, 977 F.2d 399 (8th Cir. 1992) (involving tax protestor group filings of false Forms 1099
regarding alleged payments to judges, attorneys, sheriffs, law enforcement officials and IRS
Agents); United States v. Kuball, 976 F.2d 529 (9th Cir. 1992) (false 1099s to IRS agents and
others); and United States v. Higgins, 987 F.2d 543 (8th Cir. 1993) (false reports to IRS of
cancellation of indebtedness income).
257
The authors cite United States v. Mitchell, 985 F.2d 1275 (4th Cir. 1993) (use of
charitable corporation to fund hunting trips to China and Pakistan).
258
I have not attempted to actually answer that question, but will try to do so when I find
the time (a big condition of whether this task ever gets done).
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The provision of a maximum incarceration period of one year, makes this crime a misdemeanor.
However, the last sentence provides an increased penalty for failure to file returns required under
6050I, dealing with reporting cash transactions. I deal with that offense separately below.259
2.
The Elements.
Section 7203 covers four crimes: (1) failure to pay an estimated tax or tax; (2) failure to
make (file) a return; (3) failure to keep records; and, (4) failure to supply information. Of the
crimes enumerated, failure to file is most frequently encountered. Accordingly, I focus here
principally upon failure to file. Students (and practitioners) should, however, remember the other
conduct covered.
The Fifth Circuit has no pattern jury instruction for failure to file. Accordingly, I present
here the form jury instruction from the DOJ Taxs CTM. The instructions are:
In order to sustain its burden of proof for the crime of willful failure to file a tax
return as charged in Count ____ of the indictment [information], the government
must prove the following three (3) essential elements beyond a reasonable doubt:
One: The defendant _________ was required by law or regulation to file a tax return
concerning his [her] income for the taxable year ended December 31, 20__;
Two: The defendant failed to file such a return at the time required by law;1 and
Three: In failing to file the tax return, the defendant __________ acted willfully.260
3.

a.
Brief Comments on the Elements of Failure to File.

(1)
Duty to File Return.
In the case of the most common returns (income tax returns), the Government's burden to
prove this crime is as light as it gets. The Government must, of course, prove the minimal amount
of income required to invoke the duty to file, but the Government need not launch the type of case
that would be required for an evasion conviction. Note that the Government merely prove a duty
to file the return and failure to file; there is no requirement that a tax be due.
259

CTM (2008 3d.). Instruction 26.7203-3. The CTM contains other instructions that
flesh out the requirements of these elements.
260
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(2)
Failure to File Timely.
This element is satisfied by any delinquency -- even one day. The Government will not
prosecute for a minor temporal delinquency. Indeed, as I note in more detail below in discussing
the Government's Voluntary Disclosure policy,261 a return filed much later can avoid a
prosecution, and the Government is normally more than tolerant toward delinquent tax filers. But,
technically speaking, the Government's forbearance on such delinquencies is not statutorily
commanded.
The Government usually establishes failure to file by having someone from the Service
Center testify or produce a Certificate of Assessments and Payments indicating the taxpayer's filing
history and that, after dutiful search, the IRS has been unable to find a return that has been filed or
record of any payment having been made. A Service Center employee will testify as to the
Certificate. Rule 803(10) of the Federal Rules of Evidence, as an exception to the hearsay rule,
permits the introduction of such a negative certificate to indicate that a return was not filed. That
does not mean that a defendant is without means to attack the persuasiveness of such a record.262
There will usually be some other indication of the failure to file.
Taxpayers sometimes mount the defense that they filed or paid and the IRS just lost the
return or the payment. If the taxpayer really wants to succeed in this defense, however, the taxpayer
will probably have to take the stand (thereby waiving his Fifth Amendment privilege and effectively
having the case turn upon whether the jury believes him on this critical issue).
Sometimes taxpayers file documents purporting to be returns but contain very little or no real
information other than the taxpayers name and social security number. The question frequently
arising for both civil and criminal tax purposes is whether the document, although on a return form,
is a return. In the criminal context, the question is whether the taxpayer can be prosecuted for failure
to file. The cases generally hold that a wholly deficient return is not a return and therefore that the
taxpayer can be prosecuted for failure to file even though he or she did file some form purporting
to be a return.263
(3)
Willfulness.
This is often the battleground in a failure to file case but it is a battleground where the odds
are stacked against the taxpayer who has not filed. The Government must of course establish that
261

See Silkman, discussed below beginning on p. 742.
263
See United States v. Marston, 517 F.3d 996, 1001-2 (8th Cir. 2008) (citing United
States v. Grabinski, 727 F.2d 681, 686 (8th Cir. 1984) and also noting possible error in the
prosecution and defense referring to such forms as tax returns); United States v. Vance, 730 F.2d
736, 738 (11th Cir. 1984); United States v. Moore, 627 F.2d 830, 835 (7th Cir. 1980), cert. denied,
450 U.S. 916 (1981); United States v. Smith, 618 F.2d 280, 281 (5th Cir. 1980), cert. denied, 449
U.S. 868 (1980); United States v. Reichmann, 638 F.2d 182, 184 (10th Cir. 1980); but see United
States v. Long, 618 F.2d 74, 75 (9th Cir. 1980).
262
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the taxpayer knew his or her duty to file the return, but it is the rare citizen indeed who doesnt know
that he or she has a duty to file a return or pay a tax and the jury will infer knowledge of that duty
in most cases. The Government can often show that the taxpayer filed returns in earlier years, thus
demolishing this defense if asserted. The taxpayer will often assert that factors beyond his or her
control caused him to not file and therefore his failure to do so was not willful. The Court in Cheek
discusses this issue.
Defenses are often hard to come by in failure to file cases, but one I have employed, perhaps
successfully, is the so-called failure to file syndrome.264 As I employed the defense, it was not a
traditional insanity defense, but was a variation going to the issue of willfulness. Essentially, I
argued that the taxpayer, although a successful executive because of his sales abilities, was not a
detail man and left both his personal and business life in substantial disarray because of that, so that
he could not or did not have the requisite willfulness as to his failure to file. We had many nontax
instances in his life proving the disarray objectively and we obtained competent expert testimony
that the failure to file was just a specific symptom of a larger problem. I argued that, even if the
Government were to convict, the conviction would have no effect on the part of the population that
suffered this syndrome. And, as to conviction, I argued that virtually any jury member would know
someone who suffers from a variation of this syndrome and might well be inclined not to agree that
it was a criminal problem where the facts clearly establish it, as they did here. Finally, I argued that
his income was fully reported to the IRS (via W-2s and 1099s) so that, even to the extent he thought
about or had any conscious intent with respect to the failure to file, he had no expectation that he
was not going to file (albeit tardily) or avoid any tax. Although that is technically not a defense in
a failure to file case (as it may be in an evasion case), a jury perceiving that he was just late in filing
may be reluctant to convict. (There is another defense latent in this argument having to do with
the Sentencing Guidelines, but I defer developing that argument until we reach that subject.) The
truth is that I dont know if the failure to file syndrome defense worked because, due to the
circumstances, I developed and presented it first to the AUSA after DOJ Tax had authorized
prosecution. For some reason not explained to me, the AUSA declined DOJ Taxs instructions to
prosecute the matter and sent it back to DOJ Tax, whereupon, although DOJ Tax could have
prosecuted it, DOJ Tax sent it back to the IRS and the statute of limitations closed on prosecution.265
Maybe the AUSA and DOJ Tax were just too busy to fool with a case having these features. Who
knows?266
One other defense asserted in this context is that filing a return or filing an adequate return
violates the Fifth Amendment privilege. We deal with these issues below beginning at p 257.).
264
For further research on the defense, see the following: Ryan Cochran, Failure to
File Syndrome; Lawyers, Accountants and Specific Intent, 30 Cumb. L. Rev. 507 (1999 / 2000);
Fink, Tax Controversies, Audits, Investigations, Trials 20.05[4] & [6](2004 LEXIS). Through a
LEXIS-NEXIS news search, I also found references to this defense in the popular press and those
considering the defense might check there also.
265
For a similar anecdote, see the Fink materials in the preceding footnote.
266
The Shadow, perhaps?
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b.
Miscellaneous.
Failure to file is the most common offense prosecuted by the Government. That is not to say
that many nonfilers are prosecuted; only a very small percentage probably significantly less than
1% of nonfilers are prosecuted. Still, in the universe of tax crimes that get prosecuted, failure to
file is the most common.
This reflects several imperatives. First, there is a huge tax gap among nonfilers. By
prosecuting and publicizing the convictions, the thinking is that more people are encouraged to get
back in the system. Second, although I am aware of no empirical data (there probably are some,
however), I suspect that the reasonably capturable revenue loss from nonfilers is greater than for
filers who cheat. Third, failure to file is an easy case to prove. Solid failure to file cases can be
brought with limited resources and publicized to encourage others to file.
Many failure to file cases are pursued against so-called tax protestors who can be
constituents of large protest movements. One common gambit is for such protestors to file W-4's
claiming a large number of exemptions, so as to zero out the tax payments and then failing to file.
For these taxpayers, the failure to file gambit doesnt work if the Government has the money, so
combining the failure to file with other forms of self-help (e.g., the W-4's) can step the case up to
a tax evasion felony case rather than a failure to file misdemeanor. The Government nevertheless
will usually prosecute these cases as simple failure to file cases.
c.
Failure to Pay.
As noted, 7203 also covers failure to pay. As I noted in discussing 7201, that section also
covers evasion of payment. As respects failure to pay, therefore, 7203 and 7201 have common
elements. Technically, 7203 requires only proof of willful failure to pay, whereas 7201 (the
evasion of payment prong) requires proof of an attempt to evade or defeat the payment of the tax.
The requirements are stated differently, so the 7203 failure to pay may be treated as a lesser
included offense to 7201.267
Because of the overlap, some of the same issues arise in 7203 failure to pay cases as arise
in 7201 evasion of payment cases. Thus, a common defense in 7203 cases is that, despite owing
the tax, the defendant did not have the wherewithal to pay the tax and hence his or her failure to pay
the tax was not willful.268
267
See, e.g., United States v. McGill, 964 F.2d 222, 226 (3d Cir. 1992), cert. denied 113
S.Ct. 664 (1992).
268
See E.g., United States v. McGill, supra; United States v. Tucker, 686 F.2d 230 (5th
Cir. 1982).
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F.
Failure to Collect and Pay Over ( 7202 & 7215).

1.
The Statutes.
Sec. 7202. Willful failure to collect or pay over tax

Any person required under this title to collect, account for, and pay over any
tax imposed by this title who willfully fails to collect or truthfully account for and
pay over such tax shall, in addition to other penalties provided by law, be guilty of
a felony and, upon conviction thereof, shall be fined not more than $10,000, or
imprisoned not more than 5 years, or both, together with the costs of prosecution.
Sec. 7215. Offenses with respect to collected taxes
(a) Penalty.--Any person who fails to comply with any provision of section
7512(b) shall, in addition to any other penalties provided by law, be guilty of a
misdemeanor, and, upon conviction thereof, shall be fined not more than $5,000, or
imprisoned not more than one year, or both, together with the costs of prosecution.
(b) Exceptions.--This section shall not apply-(1) to any person, if such person shows that there was reasonable
doubt as to (A) whether the law required collection of tax, or (B) who was required
by law to collect tax, and
(2) to any person, if such person shows that the failure to comply with
the provisions of section 7512(b) was due to circumstances beyond his control.
For purposes of paragraph (2), a lack of funds existing immediately after the
payment of wages (whether or not created by the payment of such wages) shall not
be considered to be circumstances beyond the control of a person.
Section 7512(b) referred to in 7215 is a provision requiring an employer who is delinquent
in his payment obligations for withheld income tax and FICA from employees compensation to pay
over more promptly than otherwise required. As I will note, 7215 covers some of the same ground
as 7202.
2.
The Elements.
I focus here on 7202.

There is no Fifth Circuit Pattern Jury Instruction for this offense. Accordingly, subject to
the caveats previously noted, I use the DOJ Tax CTM form jury instructions as follows:
In order to establish the offense charged in the indictment, the government must
prove the following three elements beyond a reasonable doubt:
First, the defendant was a person who had a duty to collect, truthfully account for,
and pay over federal income and social security taxes that the defendant was required
to withhold from the wages of employees for the calendar quarter ending
__________________;
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Second, the defendant failed to collect or truthfully account for and pay over federal
income and social security taxes that the defendant was required to withhold from
the wages of employees for the calendar quarter ending __________________; and
Third, the defendant acted willfully.269
3.
Materials.
a.
The Withhold and Pay Over Obligation.
The tax system provides for various payment agents to withhold from a payment to a payee
taxpayer and report and pay over the amount to the IRS. The payment to the IRS is essentially an
advance deposit against the tax liability the payee taxpayer may owe. Despite the pervasiveness of
the withholding and pay over mechanism in our system, the 1994 version of DOJ Taxs CTM
reported that 7202, the felony provision, had seldom been used and therefore there are few
reported cases.270 Since that time, prosecutions have stepped up and that comment about the dearth
of case authority is omitted from the later versions of the CTM.271 Moreover, the courts appear
increasingly willing to accept 7202 prosecutions and even impose stiffer penalties in comparison
to the other tax crimes, perhaps because trust fund taxes are involved.272 I include below one case,
Evangelista, for review. You will note that it is an extreme case indeed.
The most prominent instance is the employers obligation to withhold federal income taxes
and the employee's share of FICA taxes from the gross pay of employees. The employer is required
to withhold, report and pay over the withholdings to the Government. As to the employees, the
employer effectively collects by paying the employees net wages -- i.e., the gross wages net of the
amounts required to be collected from the net wages. These taxes are commonly referred to as trust
fund taxes because, upon withholding them from the employees gross wages, the employer is
deemed to hold them in trust for the Government until they are paid over. In a technical, state law
sense, the withholdings are not trust funds, for the withholding agent is not required to establish a
separate trust fund corpus, and the withholdings are usually (and legally) maintained in the general
operating or payroll account until the withholding agent is required to pay over, some days after the
withholding. Troubled businesses frequently rely upon the float from such withholdings to stay
afloat, and end up not being able to ultimately pay over the amount thus withheld. Section 6672
(the responsible person or trust fund recovery penalty) imposes civil liability upon the person or
269
CTM (2008 ed.), Instruction 26.7202-3.

CTM 9.03 (1994 ed.).
271
E.g., CTM 9.03 (2001 ed.).
272
Assistant Attorney General Hochman recently said:
Employment tax cases will be the next big push, Hochman predicted, as they
represent low-hanging fruit. Aggressive enforcement and publicity will help get
the deterrence message out, he said. Hochman noted that judges typically are
imposing stiff sentences in this area.
Jeremiah Coder, Officials Address International Tax Enforcement Efforts, 2008 TNT 235-2.
270
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persons responsible for collecting, accounting and paying over such withheld amounts. Section
7202 provides criminal penalties for this fact pattern,273 although a person in the fact pattern might
also be charged with tax evasion under 7201.274
b.
Inability to Pay.
One of the issues that lingered was whether a defendant could assert an inability to pay
defense. The defense is that, at the time the employer (or other withholding agent) was required to
actually pay over, it did not have the unfettered cash to pay over and thus should not be criminally
prosecuted for failure to pay over. The leading case suggesting that defense was a Ninth Circuit
case275 that gave hopes mostly false -- to many defendants because few other courts would buy the
defense factually or legally. Finally, in a recent case,276, the Ninth Circuit reversed field, holding
that the earlier case had in effect been overruled by intervening Supreme Court authority and
dashing the hopes of those seeking this out to criminal liability.277
273
Indeed, the predecessors of 7202 and 6672 were originally contained in 1308
of the Revenue Act of 1918, 40 Stat. 1143, and were eventually severed in the Internal Revenue
Code of 1954 into separate criminal and civil sections, 7202 and 6672 respectively. For the
legislative history, see Jenkins v. United States, 101 Fed. Cl. 122 (2011) (describing the history of
the section).
274
See e.g., United States v. Farr, 536 F.3d 1174, 1183 (10th Cir. 2008):
In reaching the conclusion that the government at trial effected an
impermissible constructive amendment of the indictment, we note that we have no
occasion to pass on the additional -- and purely hypothetical -- question whether the
government could have proceeded against Ms. Farr under Section 7201 on the theory
that, while the clinic, not she, was the employer, she willfully attempted to defeat
payment of the clinic's Section 3403 quarterly employment taxes. That is a course
the government did not pursue at trial or on appeal before us (neither is it clear
whether the government could have pursued such a course under the terms of its
indictment in this case: again, the indictment alleged, paradoxically in light of its
own witnesses' testimony that the clinic was the employer responsible for payment
of quarterly taxes, that quarterly employment taxes were due and owing by her [i.e.,
Ms. Farr]). Likewise, we have no reason to pass on the parties' passing and
undeveloped dispute whether Section 7201, rather than Section 7202, is an
appropriate vehicle for prosecuting evasion of the Section 6672 trust fund recovery
penalty.
275
United States v. Poll, 521 F.2d 329 (9th Cir. 1975).
276
United States v. Easterday, 539 F.3d 1175 (9th Cir. 2008).
277
However, for an argument that there some vestige of the inability to pay defense
remaining after Easterday and the authorities it relies upon, see Steve R. Johnson, Easterday and the
Inability to Pay Defense for Tax Crimes, 124 Tax Notes 787 (Aug. 24, 2009).
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c.
Relationship to 7215.
Perceiving difficulty in proving 7202 prosecutions and given the importance of the
withholding procedure to the tax system, Congress enacted 7215, which creates a misdemeanor
offense for certain conduct otherwise covered by 7202.278 Section 7215 applies for violations of
7512(b) which authorizes the IRS to notify withholding agents of their failure to comply with the
withholding and pay over requirements. Upon receipt of notice, withholding agents are required to
timely withhold and deposit the withheld amounts to the IRS. Then, if the withholding agent fails
to comply, the withholding agent can be prosecuted under 7215.
Failure to collect, account for and pay over are objective acts that the Government usually
has little difficulty proving. The question that is presented in a 7215 case is what type of objective
circumstances that prevents the taxpayer from paying over are defenses. The statute allows a
defense of failure to pay because of circumstances beyond the employer's control, but forecloses an
argument that lack of funds immediately after the payment of wages (i.e., a net wages payment) is
beyond the employers control. Put bluntly, the employer is supposed to not pay the employee
rather than paying net wages which leave the employer without sufficient funds to pay the IRS.
d.
Relationship Between 7202 and 7201.
I covered tax evasion, 7201 above. The pattern conduct that could draw the 7202, failure
to collect and pay over charge, could also draw a charge of tax evasion. After all, the conduct
subject to 7202 is evading the payment of taxes, albeit the employees taxes withheld by the
employer. It is the Governments option as to which to charge in these fact patterns. Consider the
following from a case where the Government chose to prosecute under 7201:
While the government undoubtedly could have charged Farr with violating 7202,
the focus of such a charge would have been different than the 7201 charge alleged
in the indictment. Given the clear language of 7202, charging Farr thereunder
would necessarily have had to focus on her obligation to collect, account for, and
pay over the medical clinic's quarterly employment taxes for the 1999 tax year. In
contrast, the 7201 violation actually charged in the indictment focused on a related,
but different obligation, i.e., Farr's obligation to pay the trust fund recovery penalty
that was assessed against her under 26 U.S.C. 6672 for failing to pay the medical
clinic's quarterly employment taxes for the 1999 tax year.
Moreover, case law fully supports, rather than undercuts, the government's
decision to indict Farr under 7201 rather than 7202. To begin with, it is well
established that charging decisions are primarily a matter of discretion for the
prosecution, and such "discretion is nearly absolute," id. at 1438. Consequently,
when a defendant's conduct violates more than one criminal statute, the government
may prosecute under either (or both, for that matter, subject to limitations on
278
The 2001 version of the CTM dropped the discussion of the difficulty of proving
7202 felony cases. CTM 9.03 (2001 ed.).
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conviction and punishment). And, absent certain allegations of impropriety, it is not

the role of the jury (or the judge) to decide whether the government has charged the
correct crime, but only to decide if the government has proved the crime it charged.
Finally, Farr cites to no statutory provision or case law that would have,
notwithstanding these general rules, required the government in this case to have
charged her under 7202 rather than 7201. Thus, in sum, we conclude that the
district court properly denied Farr's motion to dismiss the indictment.279
e.
Example - Evangelista.
I include the following case to demonstrate a typical fact pattern where a taxpayers attempts
to avoid liability under Section 6672 turns from the civil case that it usually is to a criminal case.
----------------United States v. Evangelista, 122 F.3d 112 (2d Cir. 1997),
cert denied 118 S. Ct. 1048 (1998).
JACOBS, Circuit Judge:
[The defendants, father and son, were convicted of conspiracy to defraud the IRS (18 U.S.C.
371, which I cover below) and 7202, the current topic. The taxpayers made several arguments
on appeal, one of which was regarding the proper construction of 7202.]
****
We affirm the Evangelistas' convictions and sentences in full. We write primarily to address
their second argument, regarding the proper construction of, and the requirements for conviction
under, 26 U.S.C. 7202.
BACKGROUND
[The father and members of his family, including the son that was indicted and convicted
with the father, owned and operated several active real estate development and related businesses.
The businesses operated through several entities, one of which was a payroll company serving as
centralized paymaster for the other corporations.
The businesses expanded rapidly and, by 1986, had a gross fair market value of $150-200
million. The businesses were, highly leveraged and thus vulnerable to market fluctuations. By
1991, they had lost virtually all the properties through foreclosures and the father had a substantial
negative net worth. Along with these reversals, and not surprisingly, they began experiencing
significant cash flow difficulties. As occurs often in these circumstances, the businessmen have to
279
United States v. Farr, 701 F.3d 1274 (10th Cir. 2012) (case citations and some
- 146 -
decide which among competing creditors would get paid. The businesses stopped paying over to
the IRS the trust fund taxes. The total trust fund tax liability eventually reached $1.5 million.
Although not paying over the taxes, the centralized paymaster consistently filed the appropriate
quarterly returns -- Forms 941 -- showing the withheld taxes.
In 1989, the IRS initiated collection action with respect to the then unpaid taxes. The IRS
had a series of negotiations with the businesses in which the IRS requested financial statements in
order to structure an arrangement to resolve the liability and also advised that staying current in
the trust fund liabilities was a prerequisite to structuring an arrangement to resolve the past due trust
fund taxes. No financial statements were submitted, and the businesses did not stay current on their
trust fund tax liabilities (i.e., they continued to fail to pay over the withheld amounts). Furthermore,
the family continued to take other actions that would defeat the IRS's ability to collect the tax. As
the Court said:]
In the period 1989 through 1995, the Evangelistas engaged in a series of schemes that
(according to the government) were designed to: (a) defeat collection of the trust funds by the IRS,
and (b) prevent the IRS from seizing other family and business assets to satisfy the trust fund
obligations. First, the Evangelistas repeatedly commingled personal and corporate funds, and then
spent those monies on personal expenses and new businesses, thereby beggaring Monaco and the
other entities that owed the trust fund payments. For example, the government showed that
numerous checks payable to Evangelista, Sr. in respect of the family's businesses were deposited in
personal checking accounts set up in the names of himself and his wife (jointly), and in the names
of at least two of their children, including Claude Evangelista. On those personal accounts, hundreds
of thousands of dollars in checks were drawn for (inter alia) mortgage and other expenses associated
with at least two family residences; wedding expenses for Evangelista, Sr.'s two daughters; college
tuition for a son and one daughter; and the lease payments and related expenses for a Mercedes Benz
driven primarily by Evangelista, Sr.'s wife.
The Evangelistas frustrated seizure of other family assets by transferring ownership of those
assets from family members who were personally liable for the overdue trust funds (chiefly
Evangelista, Sr.) to those who were not. For example, title to Evangelista, Sr.'s personal residence
was transferred to two of his children (jointly), and his $1 million partnership interest in one real
estate enterprise was assigned to his son Claude. Once again, these intra-family transfers and
personal expenditures took place while Monaco and other Evangelista entities owed the IRS over
$1 million in past-due trust funds for which Evangelista, Sr. (at least) was personally liable.
At trial, the defendants' principally urged that they had relied on their long-time accountant
who was their sole witness at trial. The defendants chose not to testify in their own behalf. The
court said that the apparent thrust of the defense was that the family businesses had suffered
financial hardship, and had endeavored--in good faith, and with assistance and advice from
accounting professionals--to resolve those problems as best they could. On balance, according to
the Court, the accountant's testimony was not helpful to them. The accountant's testimony also
makes clear that he consistently advised the Evangelistas (a) that they were personally liable for the
outstanding trust funds and obligated to pay them; (b) that they had no right to use the trust funds
for any purpose other than paying the IRS; and (c) that they should enter into an agreement with the
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IRS to begin at least partial payment of the funds. Most important, Reffsin never told Evangelista,
Sr. not to pay the trust funds that were owed, nor did he advise that payment could be put off or
deferred pending negotiation of a formal payment arrangement.
****
As indicated at the outset, we write chiefly to address a question of statutory interpretation
regarding the requirements for conviction under 7202. That statute, entitled Willful failure to
collect or pay over tax, provides in relevant part: Any person required under this title to collect,
account for, and pay over any tax imposed by this title who willfully fails to collect or truthfully
account for and pay over such tax shall . . . be guilty of a felony . . . . 26 U.S.C. 7202.
The Evangelistas argue that 7202 defines two offenses, expressed schematically as follows:
[1] the willful failure to collect trust fund taxes, and
[2] the willful failure to
[a] truthfully account for, and
[b] pay over such taxes.
According to the Evangelistas, the second of these offenses--the only one at issue
here--requires proof of two discrete elements: both a willful failure to truthfully account for trust
funds, and a willful failure to pay over those funds. Appellant's Brief at 36 (quoting 26 U.S.C.
7202). The Evangelistas argue that because they consistently filed the required Forms 941 tax
returns as the government apparently concedes they did truthfully account for the trust funds
that they owed; and therefore the government failed as a matter of law to prove both elements of the
crime under 7202.
The government counters that under [a] fair reading of the statute and the legislative
history of 7202, Congress intended that an employer . . . perform all three duties, namely, (1)
collection of trust fund taxes, (2) truthful accounting for trust fund taxes and (3) paying over to the
government trust fund taxes. Appellee's Brief at 33. In the government's view, the account for and
pay over provision of 7202--even assuming that the statute defines two separate offenses--is
therefore violated by the willful failure to perform either the duty to account or the duty to pay.
These competing interpretations of 7202 raise a question of first impression in this Circuit.
We agree with the government that the plain language of the disputed passage in 7202 creates a
dual obligation--to truthfully account for and pay over trust fund taxes--that is satisfied only by
fulfilling both separate requirements. Accordingly, the command of the statute is violated by one
who willfully fails either to account for or to pay over the necessary funds.
We find support for our view in one of the few published decisions to consider this issue.
The argument raised here by the Evangelistas was also presented in United States v. Brennick, 908
F. Supp. 1004 (D. Mass. 1995), and was rejected in persuasive terms by that court. Preliminarily,
the Brennick court read 7202 much the same as we do: The phrase truthfully account for and
pay over is . . . unambiguously conjunctive. Somebody who was required to 'truthfully account for
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and pay over' a tax would be required to do both things to satisfy the requirement; therefore, any
intentional failure to complete the required task (to truthfully account for and pay over the tax)
constitutes a crime. Id. at 1016.
We agree as well with the Brennick court's conclusion that:
the only plausible reading of the plain language of the statute penalizes the failure
to complete the duty imposed by law: truthfully accounting for and paying over the
withholding tax collected by an employer. The alternative reading is inconsistent
with any reasonable understanding of the purposes of the statute. It would result in
a greater penalty for one who simply failed to collect trust fund taxes than for one
who collected them and, as is charged here, used them for his own selfish purposes
. . ., so long as he notified the IRS that he had collected the tax. That Congress
intended to make such a distinction is simply inconceivable.
Id. at 1017.
In arguing the contrary position, the Evangelistas rely on two opinions by panels of the Ninth
Circuit, United States v. Poll, 521 F.2d 329 (9th Cir. 1975) (following Wilson v. United States, 250
F.2d 312 (9th Cir. 1958)). We are aware of no other authority that even remotely supports the
Evangelistas' interpretation of 7202. The Ninth Circuit in Poll stated, in the last line of a long
footnote appended to the last sentence of the opinion, We continue to regard the crime [under
7202] as requiring two failures to act, willful failure to truthfully account and willful failure to pay
over. See 521 F.2d at 335 n.3 (emphasis in original). As Brennick points out, this statement is dicta.
See Brennick, 908 F. Supp. at 1015. Poll was not concerned with whether proof of two elements
(failure to account for and pay over) was required; the only issues in Poll were how to define
willfulness under 7202, and what evidence could be adduced to show it. See, e.g., Poll, 521 F.2d
at 331. The most that can be said is that Poll (and Wilson) assume without analysis that 7202 (and
its predecessor statute in Wilson) require both a willful failure to account for and a willful failure
to pay over.
The Evangelistas' final argument is based on a comparison between 7202 and 26 U.S.C.
7215 and 7512. Section 7215 provides that it is a misdemeanor to fail to comply with 7512,
which in turn penalizes anyone who fails to collect, truthfully account for, or pay over such tax.
26 U.S.C. 7512(a)(1). The Evangelistas argue that the use of the disjunctive (or) in 7512,
violation of which is punished as a misdemeanor, demonstrates that Congress used the conjunctive
(and) in 7202 for the purpose of adding an element to an offense that is punished as a felony.
No such labored analysis is needed to account for the distinction in penalty, which can be attributed
to the fact that the felony offense under 7202 entails the element of willfulness, while the
misdemeanor under 7215 and 7512 does not.
In sum, we hold that the government satisfies the requirements for conviction under 7202
when it proves beyond a reasonable doubt that the defendant willfully failed either to truthfully
account for or to pay over the required trust fund taxes.
- 149 -
-----------[END OF EVANGELISTA CASE]------------f.
Notes on Evangelista.
Could the Evangelistas have been charged on this fact pattern with a violation of 7201
which historically is considered the more serious offense? Probably. But as should be apparent
when we discuss the Sentencing Guidelines, there is no incentive for the Government to take on the
extra burdens required for a 7201 prosecution, because the sentencing would be basically the same
anyway.
Those of you who enter a tax controversy practice will encounter the basic fact pattern in
Evangelista, although that case is an extreme one. It is not uncommon for the persons running
businesses to use the Government as the unknowing lender of last resort, by taking monies that they
have collected (or are deemed to have collected) for the Government through the payroll and using
them for other business needs. This often occurs because the business's financial condition makes
alternative lending sources unavailable. Usually, but not always, the responsible persons will view
the failure to pay trust fund taxes as a temporary expedient, hoping that the business will work
through the cash flow shortage, so as to permit the full payment of the taxes, penalties and interest.
Then, the business fails with trust fund taxes unpaid. Usually, in such cases, the Government will
limit itself to asserting only the civil penalty under 6672 (the responsible person or trust fund
recovery penalty). That penalty seeks to recoup the unpaid trust fund taxes from those persons
within the organization who were responsible for their nonpayment -- i.e., the persons who had the
authority and power to determine which creditors would get paid and thus who made or participated
in the decision to pay others rather than the IRS.
Only in egregious circumstances does the Government pursue the criminal sanctions. I hope
you can see what brought the Evangelistas to their woe -- a persistent and long-running pattern of
delaying the IRS and using the monies for other purposes even after they were fully aware of the
gravity of the problem. Of course, the Evangelistas were always subject to the civil penalty under
6672, and that would be bad enough. But, through their egregious conduct, they subjected
themselves to criminal prosecution and conviction.
G.
Fraudulent or False Returns, Statements or Other Documents ( 7207).

1.
The Statute.
7207. Fraudulent returns, statements, or other documents

Any person who willfully delivers or discloses to the Secretary any list,
return, account, statement, or other document, known by him to be fraudulent or to
be false as to any material matter, shall be fined not more than $10,000 ($50,000 in
the case of a corporation), or imprisoned not more than 1 year, or both.
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2.
The Elements.
There are no Fifth Circuit Pattern Jury Instructions, so I present here the DOJ Tax CTM form
jury instructions. The first instruction is for the presentation of a false document to the IRS:
In order to sustain its burden of proof for the crime of filing a false document as
charged in Count __ of the indictment [information], the government must prove the
following three elements beyond a reasonable doubt:
One: The defendant _________ filed a document with the Internal Revenue Service
that contained false information, as detailed in the indictment [information], as to a
material matter;
Two: The defendant knew that this information contained in this document was false;
and
Three: In filing this false document, the defendant __________ acted willfully.280
3.
Materials.
a.
Overlap with Other Tax Crimes.
Section 7207 is a misdemeanor. Crimes that meet the elements of 7207 usually also meet
the elements of a felony tax crime -- 7201, 7206(1) or a tax conspiracy, commonly referred to
as a Klein conspiracy under 18 U.S.C. 371. What this means is that, given such a set of facts, the
Government has a choice as to whether to go felony or to go misdemeanor. All other things being
equal, the Government would rather go felony, because a felony conviction has the maximum
systemic impact to support the tax system through the ripple effect.
One interesting thing to note is that, because of the Sentencing Guidelines, the actual
sentencing range for a multi-year pattern of evasion via false returns might be the same whether the
taxpayer is convicted for a felony (under either 7201 or 7206(1)) or a misdemeanor under
7207. And, guided by the now advisory Guidelines, a judge may not perceive a difference between
the felony and the misdemeanor in sentencing. When that is the case, there may be some collateral
non-sentencing differences between the felony and the misdemeanor. I cover this in more detail in
discussing the Sentencing Guidelines below.281
b.
DOJ Tax Charging Policy for 7207.
DOJ Tax policy is to only use 7207 in a limited number of cases as follows:
280
281
CTM (2008 ed.), Instruction 26.7207-3.

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The Tax Division generally disapproves the use of Section 7207 in any case
in which a defendant used a false document as part of a scheme to deceive the IRS.
In such a case, felony prosecution under 26 U.S.C. 7212(a) or 18 U.S.C. 1001
should be considered. A misdemeanor prosecution under Section 7207 may be
appropriate, however, for a defendant who cooperates fully, if the case involves an
isolated false document and there are mitigating circumstances, such as evidence that
the defendant immediately confessed when questioned about the document. This
exception particularly applies to a lower-echelon participant in a wider scheme who
agrees to cooperate fully and provide substantial assistance in the investigation and
prosecution of another individual. In such cases,
1.
any plea agreement to a misdemeanor charge is subject to the
approval of the Tax Division, which will evaluate whether the conduct at issue merits
treatment as a misdemeanor;
2.
the prosecutor recommending the misdemeanor plea should provide
a written statement confirming that the prosecutor anticipates further criminal
prosecutions and believes that the defendant will provide substantial assistance;
3.
the IRS should express its view and refer the case pursuant to 26
U.S.C. 6103(h)(3)(A);
4.
the plea agreement should be conditioned on the defendants full and
truthful cooperation with the IRS in any civil audit or adjustment of the tax liability
arising out of the circumstances of the criminal case;
5.
the tax loss should not exceed $20,000 for any year; and
6.
the defendant should sign a statement reflecting the amount of the
unreported income or fraudulent deductions and the circumstances involved for all
of the years under investigation.282
c.
Government Choice.
As noted, it is the Government's choice whether to pursue the misdemeanor 7207 charge
or the felony charge under 7201 or 7206(1). The courts have rejected any argument that a
taxpayer must be prosecuted under the misdemeanor charge rather than the felony charge, Thus, in
United States v. Fern,283 the court said:
This Court has long recognized that when an act violates more than one
criminal statute, the Government may prosecute under either so long as it does not
discriminate against any class of defendants. Whether to prosecute and what charge
282
283
CTM 16.06 (2008 ed.)

696 F.2d 1269, 1274 (11th Cir. 1983).
- 152 -
to file or bring before a grand jury are decisions that generally rest in the prosecutor's
discretion.
Does it strike you as right that conduct that violates several criminal statutes of differing
severity should give the Government the option of which statute to charge? Does this make this
aspect of our Government a government of men and not of laws? As I note below, the discretion
is mitigated, at least in terms of its bottom-line effect, by the Sentencing Guidelines.
As noted, DOJ Tax policy is to forego the felony in favor of the misdemeanor only in rare
cases. Thus, as a practitioner concerned about not only the immediate criminal case but collateral
effects of a felony conviction, you might (as I have) make strenuous efforts to get DOJ Tax to accept
a plea to one or more 7207 misdemeanors with the argument that the defendant will get the same
penalty anyway. I never have been able to convince the AUSA (who dances to the tune of DOJ Tax
on this issue), but do note that because of the special circumstances of the plea bargaining with
Andrew Fastow of Enron fame and his wife, Lea Fastow, the Government did agree to this gambit
as a way of limiting the sentencing judges discretion to sentence Lea Fastow. I discuss this gambit
further later in the text, but suggest only that most of us ordinary practitioners will not encounter a
case with the special dynamics of Lea Fastows situation where DOJ Tax would be sufficiently
motivated to allow a misdemeanor plea.284
H.
Currency Transaction Reporting ( 6050I).

1.
The Statute.
Section 6050I requires persons engaged in a trade or business who receive $10,000 in cash
in 1 transaction (or 2 or more related transactions) to make a return. The return must include the
name, address and TIN of the person from whom the cash was received, the amount of cash,
the date and nature of the transaction and certain other information as prescribed by the IRS.
There are certain exceptions and many nuances. The statute criminalizes the following:
(f) Structuring transactions to evade reporting requirements prohibited
(1) In general. No person shall for the purpose of evading the return
requirements of this section
(A) cause or attempt to cause a trade or business to fail to file
a return required under this section,
(B) cause or attempt to cause a trade or business to file a return
required under this section that contains a material omission or misstatement of fact,
or
(c) structure or assist in structuring, or attempt to structure or
assist in structuring, any transaction with one or more trades or businesses.
284
See John A. Townsend, Analysis of the Fastow Plea Agreements, 102 Tax Notes
1425 (Mar. 15, 2004) .
- 153 -
(2) Penalties. A person violating paragraph (1) of this subsection

shall be subject to the same civil and criminal sanctions applicable to a person which
fails to file or completes a false or incorrect return under this section.
*
*
*
*
In addition, 7203, the failure to file provision, provides in its final sentence as follows:
In the case of a willful violation of any provision of section 6050I, the first sentence
of this section shall be applied by substituting felony for misdemeanor and 5
years for 1 year.
2.
The Elements.
There are no Fifth Circuit Pattern Jury Instructions or CTM form jury instructions for this
crime. This provision has four criminal aspects.
a.
Failure to File.
The duty to file is in 6050I. The prosecution is under 7203 (Failure to File). The
elements under 7203 are set forth and discussed above, but to summarize are: (1) a duty to file,
(2) a failure to file, and (3) willfulness.
b.
Filing a False Return.
The prosecution is under 7206(1) (tax perjury). The elements under 7206(1) are
discussed above, but may be summarized as follows: (1) the submission of a false return; (2) the
return contained a perjury jurat; (3) defendant did not believe the return to be true and correct as to
a material matter; (2) the defendant's signing was willful.
c.
Assisting in Filing False Forms 8300.
The prosecution is under 7206(2). The elements under 7206(2) are discussed above, but
may be summarized as follows: (1) the defendant aided or assisted in the preparation of a false
return or other document with tax consequences; and (2) the defendant did so willfully.
d.
Structuring.
As set forth above, the structuring is to avoid the filing requirement. This is typically done
through breaking down a large amount of cash into separate deposits or other transactions so as to
cause each amount to fall under $10,000.
3.
Materials.
There is no 7201 evasion prosecution for failure to file the CTR or filing a false CTR
because the CTR is only informational there is no tax due and owing. However, the failure to file
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criminal statute ( 7203) which is normally a misdemeanor (maximum 1 year sentence), ups the ante
for failure to file the CTR to 5 years.
There are important civil penalties that apply to failure to file the CTR or filing a false or
inadequate CTR. These penalties are particularly important to lawyers who must struggle with the
Fifth Amendment implications of the information required to be disclosed. I include a discussion
of the Gertner case285 to give you a sense of the problems encountered in the filing obligation and
the civil penalties.
I.
More on Substantiality and Materiality.
I have noted above that substantiality and materiality, as in all of life, is generally required
before a citizen can be convicted of a tax crime. Consider the following IRS Criminal Tax
Litigation Guideline Memoranda (LGMs):
1.
LGM CT-1 (10/16/95)
I. Background
This LGM restates new prosecution and money laundering standards
applicable in criminal tax cases. It incorporates the text of Internal Revenue Service
Law Enforcement Manual IX: Text 131.1, on prosecution standards, (revised
February 13, 1995); and Text 131.2, on money laundering standards, (revised
January 23, 1995).
II. Prosecution Standards
(1) Criminal prosecution involving Title 26 violations may be recommended
in egregious cases of noncompliance. The prosecution of these cases should have a
deterrent impact and * * * *.
Note that the IRS has redacted (indicated in digital copy with asterisks (e.g.,
* * *)) the key guidelines. However, a prior LGM CT-1 from 1992 is public with the
figures then used:
2.
LGM CT-1 (1992).
I. BACKGROUND
This is to incorporate Text 131.1 (revised 3-1-88) of the Internal Revenue
Service Law Enforcement Manual IX, and applies to all criminal tax cases.
285
Beginning on p. 515.
- 155 -
II. OVERVIEW
TEXT 131.1
(1) Except as provided in (3) and (4) below, the following criteria apply to
income tax investigations:
(a) Criminal prosecution will be recommended under IRC 7201 only
if the average yearly additional tax for criminal purposes is $2,500 or more in cases
which utilize the specific item method of proof and involve uncomplicated fact
patterns.
(b) In IRC 7201 cases that utilize an indirect method of proof or
involve complex and sophisticated evasion schemes, criminal prosecution will be
recommended only if the additional tax for criminal purposes totals at least $10,000
for the prosecution period, and the additional tax for criminal purposes for any single
year within that period is at least $3,000. Thus, in a two year case involving an
indirect method of proof and/or a complex evasion scheme, the average yearly
additional tax for criminal purposes must be larger than in strongly preferred three
year cases, in order for the aggregate liability to total $10,000 for the prosecution
period.
(c) Criminal prosecution will be recommended under IRC 7203 (in
non-community property states) and under IRC 7206(1) only if the evidence
indicates that the average yearly additional tax for criminal purposes would be
$2,500 or more. In the community property states of Arizona, California, Idaho,
Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin, criminal
prosecution will be recommended under IRC 7203 only if the evidence indicates that
the average yearly additional tax for criminal purposes would be $1,500 or more. The
evidence supporting the additional tax should be as fully developed as possible.
(d) Criminal prosecution will be recommended in altered-document
type cases (IRC 7207) only if the additional tax for criminal purposes is $500 or
more for any year in question.
(2) Investigative preference will be given to cases that span three prosecution
years rather than cases involving violations provable as to only one or two years.
This preference is particularly relevant where an indirect method of proof is utilized
to establish the tax offense.
(3) Criminal prosecution may be recommended even though the additional
tax for criminal purposes averages less than the dollar amount prescribed in (1)
above in cases where flagrant or repetitious conduct is so egregious that resort to the
criminal sanctions becomes warranted. For example:
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(a) Where the taxpayer has persisted in attempting to mislead the

investigating agents or has seriously attempted to conceal his or her fraudulent
schemes, e.g., by submitting false documents or attempting to suborn false
statements by witnesses;
(b) Where the case involves a scheme known to be in frequent use by
other taxpayers, and this widespread use is believed to have an adverse affect on
voluntary compliance;
(c) Where the facts and circumstances are so flagrant as to warrant the
conclusion that a reasonable probability of conviction exists, thus differentiating the
case in a manner clearly distinguishing it from others involving a small additional
tax for criminal purposes.
(4) The exceptions in (3) above to the minimum dollar standards are intended
to the applied in only a limited number of situations. Any use of these exceptions
should focus on situations where there is sufficient basis, in view of continued
noncompliance or flagrant conduct, to warrant utilization of the criminal sanctions.
The exceptions should not be interpreted so broadly that in application they engulf
the rule. Facts which warrant an exception must be fully discussed in the transmittal
memorandum (see IRM 9631.2).
These guidelines are old and there probably is some updated guidelines that I am not aware
and, I suspect, are not available to the public.
II.
TRADITIONAL NONTAX CRIMES.

A.
Introduction.
Although the Internal Revenue Code defines a fairly comprehensive set of crimes punishing
conduct affecting the administration of the tax laws, the general criminal code, 18 U.S.C., defines
crimes that substantially overlap the crimes defined in Internal Revenue Code and also defines
crimes that are different than those defined in the Internal Revenue Code but which may be present
in conduct that affects tax administration. We have seen above in discussing the Omnibus Clause
( 7212) that that crime of obstructing or impeding tax administration is substantially the same as
the crime defined in 18 U.S.C. 1505 applying to all federal agencies. Similarly, tax crimes often
implicate other Title 18 crimes, such as mail or wire fraud (18 U.S.C., 1341 and 1343). There
is no prohibition to charging Title 18 crimes in cases of tax administration.286 Accordingly, I cover
here the Title 18 crimes most frequently encountered in tax cases.
286
United States v. Dale, 991 F.2d 819, 849 (U.S. App. , 1993).
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B.
Aiding and Abetting (Accomplice) Liability and Causer Liability (18

U.S.C. 2).
1.
The Statute.
2. Principals
(a) Whoever commits an offense against the United States or aids, abets,
counsels, commands, induces or procures its commission, is punishable as a
principal.
(b) Whoever willfully causes an act to be done which if directly performed
by him or another would be an offense against the United States, is punishable as a
principal.
This statute does not itself define a crime. Rather, it makes persons described in the statute guilty
of a substantive offense as if they were principals as a principal directly committing the crime.
Section 2(a) prescribes deemed principal status for the accomplice a person who aids and abets
a principal in the principals commission of a crime.
The key concept to understanding this statute is the concept of principal, for its design is
to make punishable as a principal someone who would not otherwise be punishable as a principal.
Syntactically, the text does not make that person a principal which is a well established concept
in Anglo American jurisprudence, but only serves to make the person punishable as if he or she were
a principal. So this invites the question of what is a principal. A principal is a person who directly
commits the substantive offense. That person is punishable for the substantive offense without any
assistance from 2. Section 2 thus operates only to punish a person as a principal if he or she is not
a principal. It does not apply to an actual principal.287 I will further discuss this critical position in
a discussion below of the limits of Section 2 derivative liability in the context of the substantive
offense of tax evasion, but ask you at this point just to try to keep the concept in mind.
2.
2(a) Aiding and Abettor / Accomplice Liability.

a.
The Elements:
The following is from the Fifth Circuit Pattern Instruction No. 2.06:
First: That the offense of ________ was committed by some person;
287
I recognize that the text of 2(a) textually applies to a person who commits the
offense (who, of course, is a principal) punishable as a principal. But that person was already a
principal and punishable as such without the aid of 2(a), so that provision is meaningless and was
clearly not what 2(a) was intended to accomplish.
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Second: That the defendant associated with the criminal venture;

Third: That the defendant purposefully participated in the criminal venture;
and
Fourth: That the defendant sought by action to make that venture successful.
b.
Materials.
(1)
General.
Section 2(a), often referred to as accomplice liability, is not itself an offense statute; its
practical effective application is to allow the person who aids and abets another person, called a
principal, in the commission of a crime to be charged and punishable as a principal. If you parse
the language of the statute, you see that it also confers principal status on persons who commit the
offense, but of course those persons are already principals and thus making them punishable as a
principal is meaningless. To restate, the practical real effect of accomplice liability is to permit
those who do not directly commit the offense but aid and abet the commission of the offense by
another to be guilty of the underlying offense. In this respect, the term aider and abettor to at least
a lay person / juror connotes some lesser actor - not the individual who actually commits the
offense - but the individual who offers assistance to the primary actor; in this sense, the primary
actor is generally considered the more culpable actor.288 Thus, if the crime is tax evasion
committed by the taxpayer, anyone assisting the taxpayer (e.g., an accountant or a lawyer) whose
actions did not rise to direct principal liability for evasion could be punishable as a principal under
2(a).
The offense is the underlying criminal statute itself e.g. tax evasion or mail fraud.289 The
aiding and abetting statute does no more than make an aider and abetter a principal to the underlying
crime. By contrast, the conspiracy statute (which I address below) creates an independent crime of
conspiracy. The conspiracy is a crime independent of the criminal offense that was the object or aim
of the conspiracy. So, logically, there need not be an underlying offense (e.g., the object of an
offense conspiracy) in order for conviction. Thus, it operates quite differently from accomplice
liability which requires completion of the underlying offense by someone.
Accomplice liability is usually specifically charged in an indictment. Even where it is not,
courts allow a jury charge on it if the evidence supports accomplice liability, the theory being that
288
See Adam Harris Kurland, To "Aid, Abet, Counsel, Command, Induce, or Procure
the Commission of an Offense": A Critique of Federal Aiding and Abetting Principles, 57 S.C. L.
Rev. 85, 86 (2005).
289
For an application of this principle, see United States v. Rabhan, 540 F.3d 344, 348th
350 (5 Cir. 2008) (a nontax case holding that a special statute of limitations for the underlying
substantive offense applies to one guilty of the underlying substantive offense through 18 U.S.C.
2; the Fifth Circuit cites, inter alia, United States v. Campbell, 426 F.2d 547 (2d Cir. 1970), which
was a tax case.)
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a charge for the substantive offense implicitly includes the charge of accomplice liability, since all
it does it make the alleged accomplice liable for the substantive offense which was charged.290
(2)
Association with Criminal Venture.
Judge Hands formulation of the requirements for accomplice liability is oft cited: The
defendant must "in some sort associate himself with the venture, that he participate in it as in
something that he wishes to bring about, that he seek by his action to make it succeed.291 In other
words, there must be a principal committing the crime whose actions are aided and abetted. The
Government need not show that the principal was convicted; indeed, the Government need not show
that the principal was indicted or even identified but it must show some other principal out there who
the defendant aided or abetted in the commission of a crime.292
(3)
The Accomplice Must Have the Principals Mens

Rea.
The person aided and abetted in the commission of the crime must have the required criminal
intent for the commission of the crime, and the accomplice must have the same criminal intent with
respect to his or her actions in aiding and abetting.293 Hence, the defendant must have the
willfulness requirement to aid and abet the tax crimes requiring willfulness.
(4)
Conceptual Overlap with Conspiracys Pinkerton

Doctrine of Vicarious Liability.
I discuss conspiracy and the Pinkerton doctrine in more detail below. For present purposes,
suffice it to say that the Pinkerton doctrine serves to make a co-conspirator liable for substantive
offenses committed by another co-conspirator within the scope of the conspiracy (meaning, as
interpreted, for crimes reasonably foreseeable). The Pinkerton doctrine thus operates like
accomplice liability to make someone other than the person committing the substantive offense
criminally liable for the substantive offense.294 Pinkerton and accomplice liability are thus separate
290
E.g. United States v. Renner, 238 F.3d 810, 814 (7th Cir. 2001); United States v.
Moore, 936 F.2d 1508, 1526 (7th Cir. 1991).
291
United States v. Peoni, 100 F.2d 401, 402 (2d Cir. 1938). But see for a fuller nuanced
discussion, Baruch Weiss, What Were They Thinking?: The Mental States of the Aider and Abettor
and the causer Under Federal Law, 70 Fordham L. Rev. 1341 (2001).
292
United States v. Campa, 679 F.2d 1006, 1010 (1st Cir. 1982); Ray v. United States,
588 F.2d 601, 603-04 (8th Cir. 1978); United States v. Powell, 806 F.2d 1421, 1424 (9th Cir. 1986).
293
CTM 21.03[2] (2008 ed.), citing a litany of cases, including United States v. Perez,
922 F.2d 782, 785 (11th Cir. 1991); and United States v. Labat, 905 F.2d 18, 23 (2d Cir. 1990).
294
The Supreme Court so noted in Pinkerton itself. 328 U.S. at 647. Justice Rutledge,
joined by Justice Frankfurter, dissented in part because (p. 651 fn. 4) the majority was holding that
conspiracy and aiding and abetting are intended by Congress to be, the same thing, differing only
in the form of the descriptive words even though the Court previously in United States v. Sall, 116
F.2d 745 (1940) rejected that proposition. See also Justice Jacksons concurring opinion in
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theories to convict for substantive crimes.295 The Supreme Court has addressed the overlap and
interplay as follows:
The rule of that case [Pinkerton] does service where the conspiracy was one to
commit offenses of the character described in the substantive counts. Aiding and
abetting has a broader application. It makes a defendant a principal when he
consciously shares in any criminal act whether or not there is a conspiracy. And if
a conspiracy is also charged, it makes no difference so far as aiding and abetting is
concerned whether the substantive offense is done pursuant to the conspiracy.
Pinkerton v. United States is narrow in its scope. Aiding and abetting rests on a
broader base; it states a rule of criminal responsibility for acts which one assists
another in performing. The fact that a particular case might conceivably be
submitted to the jury on either theory is irrelevant. It is sufficient if the proof
adduced and the basis on which it was submitted were sufficient to support the
verdict.
I discuss this further the conspiracy discussion below.
Of course, a key distinction between Pinkerton liability and accomplice liability is that
Pinkerton requires a conspiracy which is a defense separate and apart from commission of the
underlying substantive offense, whereas accomplice liability is not a separate offense but like the
Pinkerton spin on conspiracy, just makes the person liable as a principal for the substantive offense.
Moreover, Pinkerton liability seems to sweep broader than accomplice liability because Pinkerton
liability applies if the crime were only reasonably foreseeable, whereas accomplice liability
applies on to the crime expressly contemplated in committing the accomplice conduct.296 The
difference may be small, but it is important.
(5)
Relationship to Aiding and Assisting, 7206(2).
Aiding and abetting under 2(a) is not the same as aiding and assisting under 7206(2),
although there are some common elements.297 Guilt of an offense through subsection 2(a) requires
another guilty party. In the context of traditional 7206(2) liability where a preparer assists in the
preparation of a false return, the preparer could be guilty as a principal directly under 7206(2)
regardless of whether the taxpayer signing the return was guilty of any crime.298 Accomplice
liability under subsection 2(a) would require the taxpayer to be guilty of a crime, most probably
either of 7201 or 7206(1).
Krulewitch v. United States, 336 U.S. 440, 451 (1949) (complaining generally of the elasticity in
the conspiracy concept and citing Pinkerton for the novel and dubious theory that conspiracy is
equivalent in law to aiding and abetting).
295
Nye & Nissen v. United States, 336 U.S. 613, 620 (1949).
296
See Alex Kreit, Vicarious Criminal Liability and the Constitutional Dimensions of
Pinkerton, 57 Am. U. L. Rev. 585, 596 (2008).
297
United States v. Searan, 259 F.3d 434 (6th Cir. 2001).
298
See United States v. Motley, 940 F.2d 1079, 1082 (7th Cir. 1991).
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Now, in order to illustrate this point graphically, consider the Motley case.299 The defendant,
an income tax preparer who prepared false returns, had been charged and convicted under 18 U.S.C.
287 and 2(a). The court held that the defendant was not guilty of aiding and abetting under
subsection 2(a) under which he was tried because the Government failed to prove the taxpayers
committed the underlying crime. The Court refused to allow the Government to switch on appeal
to subsection 2(b), causer liability, which does not have the element of requiring that there be one
or more other persons guilty of the underlying crime. But, the Court saved the day for the
Government by holding the defendant liable for the lesser included offense of 7206(2) which did
not have the element requiring that another person (here the taxpayers) be guilty of the crime. The
Court reasoned after giving the taxpayer his accomplice victory:
Our analysis does not end here, however.
Motley does not claim on appeal that he had no connection to the illegal
deeds charged in the indictment, only that the government selected the wrong statute
under which to charge him. According to Motley, the government could have
secured a valid conviction under 26 U.S.C. 7206(2), which makes it a felony to
aid[] or assist[] in . . . the preparation or presentation under . . . the internal revenue
laws, of a return . . . which is fraudulent or is false as to any material matter, whether
or not such falsity or fraud is with the knowledge or consent of the person authorized
or required to present such return. (emphasis supplied). Obviously, a conviction for
aiding and abetting under this section does not require proof that the taxpayer
committed an offense against the government. See United States v. Hooks, 848 F.2d
785, 791 (7th Cir. 1988).
At oral argument, we asked defendant's counsel if section 7206(2) was not
simply a lesser-included offense of the section 2/section 287 violation charged in
Motley's indictment, and he conceded that it was. A lesser-included offense is one
whose elements are a subset of the elements of a greater offense. Schmuck v. United
States, 489 U.S. 705 (1989); see also Sansone v. United States, 380 U.S. 343, 350,
(1965) (the lesser offense must be included within but not . . . be completely
encompassed by the greater). A lesser-included offense is thus by definition
included in an indictment charging a greater offense. Cf. Schmuck, 109 S. Ct. at
1451 (an indictment contains the elements of both lesser and greater offenses, giving
the defendant notice that he or she may be convicted of either). It is clear that a
defendant need not be charged with a lesser included offense in order to be found
guilty thereof. United States v. Martel, 792 F.2d 630, 638 (7th Cir. 1986); see also
United States v. Teslim, 869 F.2d 316, 325 (7th Cir. 1989) (a 'defendant may be
found guilty of an offense necessarily included in the offense charged') (quoting
Fed. R. Crim. P. 31(c)). In this case, defendant conceded that section 7206 is a
lesser-included offense of the greater offense charged in sections 2 and 287. We
agree. The two crimes are identical except for the underlying offense requirement.
Under section 2(a) -- the only section mentioned to the jury in this case -- the
299
United States v. Motley, 940 F.2d 1079, 1082 (7th Cir. 1991).
- 162 -
government must offer proof that the taxpayers committed some offense, i.e., that
they had knowledge that their returns were fraudulent. Under section 7206(2), proof
of an underlying offense is unnecessary.
We thus conclude that Motley was properly convicted under section 7206(2),
a lesser-included offense of his charged offense.
This is a startling holding and is based on the lesser-included offense concept that I address later.
But, in one fell swoop, the Court noted the important differences between subsections 2(a) and
2(b) and introduced you to the lesser-included offense concept in a startling context.
3.
2(b) Causer Liability.

a.
Elements:
The following are the elements of this crime from a parsing of the statute, which is very
short: Whoever willfully causes an act to be done which if directly performed by him or another
would be an offense against the United States, is punishable as a principal:
1.
2.
3.
The defendant must have acted willfully.

The defendant must cause an act to be done.
The act would be an offense if the defendant had performed the act directly.
b.
Materials
(1)
Introduction.
Section 2(b) confers deemed principal status on a person who does not commit the acts
required for the underlying substantive offense but uses another innocent person to commit those
crimes.300 Indeed, if the other person were not innocent, the defendant would be either directly
guilty of the crime or an accomplice punishable as a principal under 2(a). Section 2(b) thus covers
ground not covered 2(a) which requires that the other person commit the crime and makes the
aider and abetter liable along with that other person. At least in the tax area (I have not surveyed
all the law), such a person causing the crime of tax evasion would be directly liable even without
2(b).301
In United States v. Motley, 940 F.2d 1079 (7th Cir. 1991), the defendant was charged with
aiding and abetting violation of the false claims act (18 U.S.C. 287) by preparing false refund
claims on a contingency fee basis. The Government charged him as an accomplice, but tried the
300
United States v. Armstrong, 550 F.3d 382, 393 (5th Cir. 2008) (holding that 2(b)
liability for the substantive crime may attach to a defendant using an innocent person to commit the
crime and and citing United States v. Levy, 969 F.2d 136, 141 (5th Cir. 1992) (which also rejected
the notion that the defendant be the "sole and proximate cause" of the crime)).
301
_____________
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case under a theory of liability under subsection (a) without proving that the taxpayers were guilty
of filing false claims. The defendant was convicted. On appeal, the Government realized its error
and no harm, no foul because the proof established his guilt under subsection (b). The Court said:
The government claims that such proof was unnecessary in this case because
18 U.S.C. 2 covers both traditional aiding and abetting, which requires proof that
the principal committed some underlying offense, as well as a second type of aiding
and abetting. The traditional notion of aiding and abetting is found in subsection (a)
of 18 U.S.C. 2: whoever commits an offense . . . or aids, abets, . . . or procures
its commission, is punishable as a principal. A variation of the traditional rule
appears in subsection (b) of 18 U.S.C. 2: whoever willfully causes an act to be
done which if directly performed by him or another would be an offense against the
United States, is punishable as a principal. Motley could thus be found guilty of
causing a taxpayer to commit the crime even though the taxpayer did not have the
criminal intent necessary to sustain a conviction. Whether the taxpayer committed
a specific criminal offense becomes irrelevant; the question is whether the act Motley
caused the taxpayer to perform (i.e., mailing a false claim to the government) would
be actionable if performed directly by Motley. It is . . . clear that under 18 U.S.C.
2(b) one who causes another to commit a criminal act may be found guilty as a
principal even though the agent who committed the act is innocent or acquitted.
Ruffin, 613 F.2d at 412; see also United States v. Cook, 745 F.2d 1311, 1315 (10th
Cir. 1984) (it is well established that an individual is criminally culpable [under
2(b)] for causing an intermediary . . . to commit a criminal act or to fail to perform
a legally imposed duty, even though the intermediary has no criminal intent and itself
is innocent of the substantive crime). The record in this case clearly supports the
argument that the government entered evidence sufficient to sustain a conviction
under section 2(b).
The problem with the government's section 2(b) argument, however, is that
it never requested (and the court never gave) a jury instruction on section 2(b). The
jury instructions on aiding and abetting related solely to section 2(a) -- traditional
aiding and abetting that requires proof of an underlying offense. Motley's conviction
under section 2(a) was thus improper because the government failed to offer any
proof that the taxpayers in question committed some offense against the federal
government.
(2)
What does Causer Liability Really Do?
I said earlier that practical application of causer liability in 2(b) is to confer deemed
principal liability on a person who causes an innocent person to effect the actus reus of a crime.
This is nicely illustrated in a tax shelter context where the designers and promoters of a complex tax
shelter realize it is fraudulent, but the taxpayer who uses the shelter to obtain a tax benefit does not
know it is fraudulent. If the taxpayer were guilty of the underlying crime of evasion, the promoters
in this example arguably could be guilty of tax evasion as direct principals (persons who cause tax
evasion are guilty of the substantive offense) or as accomplices derivatively liable under 2(a). In
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either event, causer liability under 2(b) would be superfluous. Section 2(b) liability is designed
to confer derivative liability making the causer punishable as a principal only where the person is
not a principal and his actions are not accomplice actions under 2(a) because there is no principal.
4.
The Limits and Scope of 2 Derivative Liability.
In each instance, the statute has a limited function of making a person punishable as a
principal. The simple concept I flesh out here is that neither derivative liability provision has any
application to a person who is already a principal. Is this important? Do we really need to slice and
dice whether the person is a principal or punishable as a principal?
Consider a single count indictment for tax evasion. The facts alleged to support the charge
is that (i) the defendants, partners of an accounting firm, marketed tax shelters which the defendants
knew did not offer the tax benefits they touted and (ii) those defendants prepared the returns falsely
claiming the benefits. The indictment cites as the statutory basis for the charge 7201 and 18
U.S.C. 2(a).302 Under 7201, assuming that the returns made claims known by the defendants to
be fraudulent, the defendants could have been charged directly under 7201 (even though the
taxpayer filing the return is normally the party charged directly under this section). In presenting
that single count to the jury, the Judge instructs on both statutes. Half the jurors believe the
defendants guilty as principals under straight-forward 7201 concepts, but not as accomplices; the
other half believe that they are not guilty as principals but are guilty as accomplices. They are
unanimous as to the bottom line guilt for the single count charged but get there two nonunanimous ways. Is there a problem here?303 Although some courts reason that all the jury has to
do is find the defendant to be a principal in the commission, so how the jury makes that finding
some finding actual principal and some finding deemed principal under 2(a) is not important.
304
Other courts, however, will give an instruction like this (in a tax shelter case with nontaxpayer
defendants where the court instructed on the three theories of liability for tax evasion direct
actual principal, accomplice deemed principal, and causer deemed principal):
For each defendant, if you find that the government proved beyond a
reasonable doubt that the defendant is guilty of tax evasion on a particular count, on
any of these three theories, you should find defendant guilty on that count. You must,
however, be unanimous that a defendant is guilty on at least one of the three theories
in order to convict. And you all must agree on at least one theory. If you find that the
302
Courts have sustained convictions under 18 U.S.C. 2(a) even though the indictment
does not mention it. United States v. Kasvin, 757 F.2d 887 (7th Cir. 1985); United States v.
McCambridge, 551 F.2d 865 (1st Cir. 1977); United States v. Frye, 548 F.2d 765 (8th Cir. 1977).
303
Adam Harris Kurland, To Aid, Abet, Counsel, Command, or Procure the
Commission of an Offense: A Critique of Federal Aiding and Abetting Principles, 57 S.C. L. Rev.
85 (2005)
304
See United States v. Garcia, 400 F.3d 816 (9th Cir. 2005), cert. denied 546 U.S. 1080
(2005) (a non tax case).
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government has not satisfied that burden, you must find the defendant not guilty on
the relevant count.305
Even though the distinction between accomplice and principal may still be important, by
making the person liable as a principal, the procedural aspects of the referenced criminal statute
(e.g., 7201 in the above example) are applicable to the aider and abettor. Thus, the statute of
limitations for the underlying offense applies even where it differs from the Title 18 general statute
of limitations.306 Similarly, venue lies where the underlying offense was committed.307
Now, I really want to drill down on the issue of why it is important to distinguish between
a principal and persons under 2 who are only punishable as principals. There have recently been
three large criminal prosecutions of promoters of allegedly fraudulent tax shelters. In each instance,
the persons prosecuted were the enablers (lawyers, accountants and financial experts). The charges,
305
This instruction was given in the case of United States v. Larson (SDNY No. 05 CR
888 (LAK)). I also want to digress a bit on how principal and accomplice liability was presented
to the jury in that case. I represented one of the many original defendants in that case. Most of the
defendants were dismissed about three years after the indictments because of prosecutorial abuse,
so I had a ample opportunity to observe the roles of all of the defendants. Of the four remaining
defendants, only three were charged with the evasion with respect to which this instruction was
given. Those three served enabler roles one was an attorney who wrote the tax shelter opinions
and the other two were principals in a financial firms that implemented the investment strategy
designed, they claimed, to give a profit motive for the investors. The prosecutors conceded that the
taxpayers were not principals in any tax crime. The three defendants were indistinguishable in terms
of the roles that they served in enabling the alleged tax evasion. So, at least in my mind, if guilty
at all, the defendants were either all actual principals or all deemed principals as accomplices. But,
you see the problem, if the latter there is no actual principal which accomplice liability requires.
The judge, in the instruction, did address the issue only superficially, by stating that the jury could
find one or two of the defendants to be principals and the other one or two to be accomplices. But,
if they indeed served the same roles vis-a-vis actual principal status, any such division was not
possible. By the same token, however, if the jury really understood these instructions, it would have
known that it could convict only by finding that the three defendants were actual principals. The
problem is that, given how the instructions were presented, I have no comfort that that is what the
jury did. Of course, we must indulge the presumption that the jury got it right, but I think the force
of that presumption is weak in this case. Larson was the first of three similar tax shelter
prosecutions of enablers. Similar theories of liability instructions were given in the second case
(United States v. Coplan (S.D.N.Y. No. 07-453)). But in the third case (United States v. Daugerdas
(S3 09 Cr. 581 (WHP)), Judge Pauley spotted that the problems with theories of liability and
concluded that they were incorrect or more likely to confuse than assist the jury and submitted the
case to the jury on direct principal liability for tax evasion without derivative liability instructions.
306
United States v. Gressett, 773 F.Supp. 270 (D. Kan. 1991).
307
United States v. Buttorff, 572 F.2d 619 (8th Cir. 1978), cert. denied, 437 U.S. 906
(1978), rehearing denied, 439 U.S. 884 (1978).
- 166 -
in part here pertinent, were that the defendants were guilty of tax evasion, citing 7210 and 2.308
The taxpayers whose taxes were affected by the shelters were not prosecuted and, in each case, the
Government stipulated that, for purposes of the case, the taxpayers were not guilty of tax evasion.
In the first two of the cases, the judges instructed the jury that the jury could find the defendants
enablers guilty as direct principals who committed the substantive offense of tax evasion, as
accomplices derivatively liable under 2(a) or as causers derivatively liable under 2(b). In the
third case, Judge Pauley carefully focused on the allegations and refused to instruct on derivative
liability. Judge Pauley rightly saw that the enabler defendants actions implicated only their
potential liability as direct principals of the crime of tax evasion. Accomplice liability under 2(a)
was not present because, if any of the defendants were accomplices, they all were but then
accomplice liability could not apply because there was no principal. And, causer liability under
2(b) was simply the type of causal conduct that would give rise to direct principal liability for tax
evasion.309 In other words, the defendants were guilty of the crime of tax evasion or they were not
guilty of the crime of tax evasion under any theory. Instructing the jury on any theory other that
direct principal liability would be more confusing than helpful.
I develop these concepts in more detail in an article, so I do not develop them further here.
C.
False, Fictitious and Fraudulent Claims (18 U.S.C. 287 & 286).
1.
The Statute.
287. False, fictitious or fraudulent claims

Whoever makes or presents to any person or officer in the civil, military, or
naval service of the United States, or to any department or agency thereof, any claim
upon or against the United States, or any department or agency thereof, knowing
such claim to be false, fictitious, or fraudulent, shall be fined not more than $10,000
or imprisoned not more than five years, or both.
308
The indictment also charged a conspiracy to commit tax evasion and sought to apply
the Pinkerton doctrine to hold the defendants liable for the substantive crimes of other conspirators
within the scope of the conspiracy. I do not deal with that charge here.
309
Actually, the drill down on this is because causal action that can make a defendant
directly guilty of the substantive offense is not within the scope of 2(b), for it is intended to apply
when the causal actions would not otherwise create direct principal liability. The prototypical
example of where it is intended to apply is where the substantive offense can be committed only a
person within a defined class (say a director of a corporation) but a person outside that class causes
an innocent person within the class to commit the crime. If the person within the class were guilty,
then the causer would be an accomplice liable under 2(a); only if the person is not guilty of the
offense can the person outside the class be a causer liable under 2(b). If, however, the substantive
offense can directly commit the crime, the causal actions will create direct principal liability and
2(b) has no application.
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286. Conspiracy to defraud the Government with respect to claims

Whoever enters into any agreement, combination, or conspiracy to defraud
the United States, or any department or agency thereof, by obtaining or aiding to
obtain the payment or allowance of any false, fictitious or fraudulent claim, shall be
fined not more than $10,000 or imprisoned not more than ten years, or both.
2.
The Elements.
a.
287 - False Claims.
The Fifth Circuit Pattern Jury Instructions state:

Title 18, United States Code, Section 287, makes it a crime knowingly to
make a false or fraudulent claim against any department or agency of the United
States. The _______ [name of agency] is a department or agency of the United
States within the meaning of that law.
First: That the defendant knowingly presented to an agency of the United
States a false or fraudulent claim against the United States; and
Second: That the defendant knew that the claim was false or fraudulent.
It is not necessary to show, however, that the government agency was in fact
deceived or misled.
To make a claim, the defendant need not directly submit the claim to an
employee or agency of the United States. It is sufficient if the defendant submits the
claim to a third party knowing that the third party will submit the claim or seek
reimbursement from the United States (or a department or agency thereof).310
b.
286 Conspiracy.
DOJ's CTM provides the following instruction:

To sustain the charge of conspiracy to defraud the government with respect
to claims, the government must prove the following propositions:
First, the defendant entered into a conspiracy to [obtain payment; allowance;
aid in obtaining payment; aid in obtaining allowance] of a claim against [the United
States; a department or agency of the United States];
Second, the claim was false, fictitious, or fraudulent; and,
Third, the defendant knew at the time that the claim was false, fictitious, or
fraudulent.
If you find from your consideration of all the evidence that each of these
propositions has been proved beyond a reasonable doubt, then you should find the
defendant guilty.
310
Fifth Circuit Pattern Jury Instruction No. 2.19.
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If, on the other hand, you find from your consideration of all the evidence
that any of these propositions has not been proved beyond a reasonable doubt, then
you should find the defendant not guilty.311
3.
Materials.
a.
Falsity and Materiality.
Section 286 has no textual materiality requirement. But, like Neder, the statute does use the
common law word defraud which imports the materiality requirement.312 Section 287 also has no
textual materiality requirement but does have a fraudulent requirement but that requirement is
stated in the disjunctive along with false and fictitious. Because it is stated in the disjunctive,
courts have held that conviction under 287 does not require materiality.313
b.
The Defendant Must Know of the Falsity.
The statute requires knowledge as an element. The statute does not require willfulness,
common in the tax crimes, as a statutory element. Notwithstanding that, however, the knowledge
requirement is probably coterminous with willfulness in this setting.
c.
Conspiracy to Submit a False Claim.
This is basically just a specific conspiracy provision dealing with false claims and is, except
requiring a nexus to a false claim, coterminous with the general conspiracy statute. I accordingly
refer you to the discussion of conspiracy below. I do note here, however, that, unlike the general
conspiracy statute the language of which has an overt act requirement, the 286 conspiracy has no
text requiring an overt act and thus the courts do not require an overt act.314
d.
Overlap with More Focused Tax Crimes.
This charge usually raises its head in a tax setting in filing a return or an amended return
claiming a refund of taxes paid. The CTM reports that Tax charges under these statutes often are
brought against a defendant who filed multiple fictitious income tax returns claiming refunds of
income tax in the same year, particularly when the defendant personally received and retained some
311
CTM Government Proposed Jury Instruction No. 18.286-1 (2008 ed.) (regarding 18
U.S.C. 286).
312
United States v. Saybolt, 577 F.3d 195 (3d Cir. 2009), cert. den. ___ U.S. ___, 130
S.Ct. 1090 (2010) (also holding that the failure to instruct as to materiality was harmless error the
permitted affirmance).
313
Id.
314
United States v. Lanier, 920 F.2d 887, 892, rehg denied en banc, 931 F.2d 901 (11th
Cir. 1991).
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or all of the proceeds. 315 As should be apparent, there is considerable overlap with some of the tax
specific crimes. The CTM thus notes that:
Many false refund claim cases could also be charged using 26 U.S.C. 7206(1) or
(2) (false returns), or 18 U.S.C. 1001 (false statements), 1341 (mail fraud) or
1343 (wire fraud). Section 287 is preferred to Section 7206 when the defendant
pocketed the refund proceeds, because restitution for Title 18 offenses is more
readily available than for Title 26 offenses. See 18 U.S.C. 3663(a)(1).316
So why use 286 rather than these the tax focused crimes when a claim for refund is a tax related
malfeasance? One reason is that the Court can award restitution to the Government. As I note
elsewhere (p. 346), the Court cannot award restitution for a Title 26 offense of conviction, but can
for a Title 18 offense of conviction.317
D.
Conspiracy.
1.
The Statute.
371. Conspiracy to commit offense or to defraud the United States

If two or more persons conspire either to commit any offense against the
United States, or to defraud the United States, or any agency thereof in any manner
or for any purpose, and one or more of such persons do any act to effect the object
of the conspiracy, each shall be fined not more than $10,000 or imprisoned not more
than five years, or both.
If, however, the offense, the commission of which is the object of the
conspiracy, is a misdemeanor only, the punishment for such conspiracy shall not
exceed the maximum punishment provided for such misdemeanor.
2.
The Elements.
a.
Offense Conspiracy.
The offense conspiracy is based upon the first definitional branch of the statute (conspire
* * * to commit an offense against the United States). The Fifth Circuit Pattern Instructions
provide:
For you to find the defendant guilty of this crime, you must be convinced that the
government has proved each of the following beyond a reasonable doubt:
315
CTM 22.02[1] (2008 ed.).

CTM 22.02[1] (2008 ed.) (Footnote omitted).
317
CTM 22.01[1] (2008 ed.) (Section 287 is preferred to Section 7206 when the
defendant pocketed the refund proceeds, because restitution for Title 18 offenses is more readily
available than for Title 26 offenses. See 18 U.S.C. 3663(a)(1).)
316
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First: That the defendant and at least one other person made an agreement to commit
the crime of _______ (describe) as charged in the indictment;
Second: That the defendant knew the unlawful purpose of the agreement and joined
in it willfully, that is, with the intent to further the unlawful purpose; and
Third: That one of the conspirators during the existence of the conspiracy knowingly
committed at least one of the overt acts described in the indictment, in order to
accomplish some object or purpose of the conspiracy.318
b.
Defraud Conspiracy (Klein Conspiracy).
The defraud conspiracy is based upon the second branch of the statute (conspire * * * to
defraud the United States). The defraud conspiracy is the one commonly encountered in tax
prosecutions. This conspiracy in a tax setting is commonly referred to as a Klein conspiracy in
reference to the leading tax case involved this defraud conspiracy.
The Fifth Circuit has no pattern jury instruction. The following is from DOJ's CTM:
The defendant is charged in Count ___ of the indictment with conspiring to
[describe] in violation of Section ___ of Title ___ of the United States Code. In order
for the defendant to be found guilty of that charge, the government must prove each
of the following elements beyond a reasonable doubt:
First, [beginning on or about ____ and ending on or about ____] [starting sometime
before ____] there was an agreement between two or more persons to defraud the
United States by * * * that involved the impairing, impeding, obstructing, or
defeating of the lawful functions of an agency of the government, such as the IRS,
by deceit, craft, trickery, or means that are dishonest.
Second, the defendant became a member of the conspiracy knowing of at least one
of its objects and intending to help accomplish it; [and]
Third, one of the members of the conspiracy performed at least one overt act for the
purpose of carrying out the conspiracy, with all of you agreeing on a particular overt
act that you find was committed.319
c.
Other Instructions.
Both the Fifth Circuit Pattern Instructions and DOJ's CTM Proposed Instructions contain
other instructions that clarify elements of the conspiracy offense as set forth in the general
instructions above. For example, there are instructions that discuss the nature and scope of the
318
319
Fifth Circuit Pattern Instruction 2.20.

CTM Instruction No. 18.371-9 (2008 ed.).
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required agreement, single or multiple conspiracies, withdrawal from a conspiracy, etc. These go
into much greater detail on the law of conspiracy than is appropriate in this class and are fact
specific based upon the evidence at trial. The foregoing charges introduce the themes I want to
develop for this class.
3.
Materials.
a.
General.
Conspiracy charges are frequent add-ons in charging traditional tax crimes to permit the
Government to increase its chances of obtaining a conviction.320 Even beyond the considerable
elasticity of the conspiracy concept from a substantive perspective,321 the conspiracy charge offers
the Government great advantages. The mere charge of conspiracy connotes something sinister,322
and the law treats a conspiracy as a serious criminal act independent of any offense which might be
the object of the conspiracy.323 Moreover, herding a gaggle of defendants into a single case with an
overarching conspiracy charge may make it difficult for the jury to assess independently the guilt
or innocence of each defendant and invite a finding of guilt by association. Conspiracy cases tend
320
In further discussing the defraud / Klein conspiracy, I have learned from and relied
on several seminal articles. The seminal article is Abraham S. Goldstein, Conspiracy to Defraud
the United States, 68 Yale L.J. 405 (1959) (hereafter, Goldstein, Conspiracy). Goldstein, a professor
at Yale Law School, was not just an academic; he also served as co-counsel to a defendant in Klein,
the seminal tax defraud conspiracy case and his article was inspired by that experience. I have also
found particularly helpful two articles that deal generally with conspiracy (without special focus on
the defraud conspiracy): Benjamin E. Rosenberg, Several Problems in Criminal Conspiracy Laws
and Some Proposals for Reform, 43 No. 4 Crim. L. Bull. 1 (July-Aug. 2007); and Neal Kumar
Katyal, Conspiracy Theory, 112 Yale L. J. 1307 (2003) (arguing, in the federal conspiracy context,
that there is societal justification founded in the dynamics of group behavior to separately
criminalize and punish a group agreement, which is the underpinning of the conspiracy laws, but
deferring on the propriety of the procedures that have been develop to apply the general
justification). See also, Philip E. Johnson, The Unnecessary Crime of Conspiracy, 61 Cal. L. Rev.
1137 (1973). Finally, I direct the reader to my own article dealing with the defraud conspiracy and
tax obstruction ( 7212). The article is John A. Townsend, Is Making the IRS's Job Harder
Enough?, 9 Hous. & Bus. Tax L.J. 260 (2009). Much of what I say in the text regarding the Klein
conspiracy is expounded in more detail in that article.
321
Krulewitch v. United States, 336 U.S. 440, 445-446 (1949) (Jackson, J., concurring)
([The crime of conspiracy is an] elastic, sprawling, and pervasive offense. * * * The modern crime
of conspiracy is so vague that it almost defies definition.); and Goldstein, Conspiracy, supra, at 428
(calling the defraud conspiracy a crime of many meanings and seemingly infinite elasticity).
322
Krulewitch v. United States, 336 U.S. 440, 448 (1949) (Jackson, J., concurring) :
The crime comes down to us wrapped in vague but unpleasant connotations. It sounds historical
undertones of treachery, secret plotting and violence on a scale that menaces social stability and the
security of the state itself.
323
United States v. Recio, 537 U.S. 270, 274-275 (2003) (That agreement is a distinct
evil, which may exist and be punished whether or not the substantive crime ensues.)
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to be more complex as the Government mounts extensive evidence to connect the dots real or
imagined among the alleged conspirators, particularly in allegedly large conspiracies such as
involved in Stein.324 Furthermore, the Government gets vicarious Pinkerton liability for offenses
committed by others in furtherance of the conspiracy, ability to admit statements that would
otherwise be inadmissible hearsay, relaxed standard of proof and relevancy, tolling or refreshing of
the statute of limitations by remote participants, and venue in remote judicial forums of the
Governments choosing.325 With all of these benefits and more,326 Judge Learned Hand long ago
noted, correctly, that conspiracy is the darling of the modern prosecutor's nursery.327
324
In Stein, the Government listed nearly 70 witnesses and 2,000 exhibits totaling more
that 150,000 pages and estimated that the case in chief would take four months, from which the trial
judge extrapolated that the trial would be six to eight months. United States v. Stein, 495 F.Supp.
2d 390, 418 (S.D.N.Y. 2007). For the dangers inherent in such a lengthy and sprawling criminal
trial to a jury, see the dissenting opinion to the order denying petition for rehearing en banc in
United States v. Warner, 506 F.3d 517 (7th Cir. 2007), cert. denied 128 S.Ct. 2500 (2008) (the
dissenting opinion was joined by Posner, Kanne and Williams without specific attribution to any
particular judge, but the dissenting opinion has all the earmarks of authorship or at least major
contribution by Judge Posner).
325
See Goldstein, Conspiracy, pp. 407 (standards disappear), 409 (re vicarious liability,
hearsay, statute of limitations, and venue); 411-412 (relaxed standard of proof and relevancy); see
also, Pinkerton, 328 U.S. at 650. See also Nye & Nissen v. United States, 336 U.S. 613, 626 (1949)
(Frankfurter, J., dissenting) (Prosecutors seem to think that by this practice all statutes of
limitations and many of the rules of evidence established for the protection of persons charged with
crime can be disregarded.).
326
See Benjamin E. Rosenberg, Several Problems in Criminal Conspiracy Laws and
Some Proposals for Reform, 43 No. 4 Crim. L. Bull. 1 (July-Aug. 2007).
327
Harrison v. United States, 7 F.2d 259, 263 (2d Cir. 1925). see also Goldstein,
Conspiracy, p. 409 (1959) (noting that conspiracy has been a prosecutor favorite for centuries). One
author has noted that conspiracy charges are included in more than one-quarter of all federal
criminal prosecutions. Katyal, supra.
In United States v . Reynolds, 919 F.2d 435, 439 (7th Cir. 1990), Judge Easterbrook
lamented that the conspiracy add-ons are inevitable because prosecutors seem to have conspiracy
on their word processors as Count I; rare is the case omitting such a charge. See also Kathleen F.
Brickey, In Enron's Wake: Corporate Executives on Trial, 96 J. Crim. L. & Criminology 397, 401
& 420-423 (2006) (empirical research that, in federal corporate crime cases during the period 2002
through 2006), over 2/3s of the cases had multiple defendants and all of those had at least one
conspiracy count). Judge Easterbrook proceeds to discount the value of piling on this charge, calling
it pointless because of the way the Sentencing Guidelines work; although, once a formidable
weapon in the prosecutor's arsenal, has become a distraction, useful only to obtain an extra $50
special assessment and to generate complex issues for appeal. Over my many years of practice,
I find that disagreeing with Judge Easterbrook carries considerable risk of error, but in this case I
do disagree for the reasons noted in the text. Prosecutors perceive the conspiracy charge as a
conviction enhancer, even if not a sentencing enhancer; otherwise, if it were only a mere distraction,
prosecutors would not encourage perhaps a euphemism for direct grand juries to add the charge
to the indictment. Moreover, I have observed that in complex, multi-defendant white collar
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Not surprisingly, therefore, the Government trots out the conspiracy charge whenever it can
imagine more than one bad guy behind the tree it is so easy to do.328 The conspiracy count
allegations are framed as a cascade of allegations telling a damning story (if true and, although
literally true, not misleading),329 but sometimes producing more heat than light. This contrasts with
counts for the tax offenses which are dry, sparse, boring, and usually not even flowered up for
dramatic effect.330 The benefits for the Government are great, and the downsides are few; after all,
the prosecutors life and liberty are not at stake. This means, of course, that the Governments
(including tax) crime cases, the Government is not indifferent as to which counts a pleading
defendant admits guilt; rather, Government wants the conspiracy plea for the benefits it will bring
psychological, publicity wise, and trial wise in the trial of the remaining defendants. That
pleading defendant will mount the stand and admit that he is guilty of the loosey-goosey conspiracy
charge the Government is attempting to prove beyond a reasonable doubt, thus giving that
Governments claim a credibility that it might not otherwise have. With regard to defendants
pleading to achieve a deal a common phenomenon of our system so heavily dependent upon pleas,
this ability to offer a deal to a co--conspirator is itself a powerful tool to incentivize access to
information to ferret out and punish the bad guys. See Katyal, supra, pp. 1328-1333. Finally, by
piling on this or some other obstruction count along with substantive counts, the prosecutor further
increases the pressure for a plea for the risk averse facing a potential long sentence. Julie
O'Sullivan, The Changing Face of White-Collar Crime: The Federal Criminal Code is a Disgrace:
Obstruction Statutes as a Case Study, 96 J. Crim. L. & Criminology 643, 673 (2006).
328
Much as Joe McCarthy imagined a communist behind every tree. Even if this
statement is hyperbole, I think it is moderate hyperbole.
329
There is a critical difference between truth that is fair and truth that is misleading.
In Bronston v. United States, 409 U.S. 352 (1973), the defendant charged with perjury answered the
questions with the literal truth, but in context clearly intended to mislead. My suggestion in the text
is that the same phenomenon of truthful but contextually misleading statements can be made in an
indictment by cherry-picking some snippets of literal truth that, in context, are not representative
and are therefore misleading. When citizens (as opposed to prosecutors) do that, however, the
question I address later is whether that is obstruction. Why is it not some form of obstruction when
the Government does it?
330
See e.g., the prototypical pattern 7201 instructions in the CTM Instructions
26.7201-1 ff (2008 ed.) that is so dry, spare, and to the point, that I will not disserve the reader by
quoting it here. The tax counts in Stein are cut from the same cloth 43 counts covering only 4
paragraphs (presenting multiple counts in tabular format) and 7 pages (although these counts
perfunctorily incorporate by reference the conspiracy count paragraphs). By contrast, Stein
illustrates the embellishments encountered with conspiracy claims. The Stein conspiracy count,
Count One, takes the Government 62 pages and 154 paragraphs (numbered paragraphs and
subparagraphs) to charge. Suffice it to say, the Government resists any temptation to state just the
facts in an objective way as it spins its tale of alleged evil doing. Of course, one advantage of
sparse criminal counts for substantive tax crimes is that, the more that is said, the more possibility
of a fatal variance. See e.g., United States v. Farr, 536 F.3d 1174 (10th Cir. 2008) (the Government
added detail to the count for tax evasion from which it varied, resulting in reversal of the conviction;
Had the government simply charged Ms. Farr generically under Section 7201 with the willful
evasion of a tax, we might have a different situation.)
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power to tack on conspiracy charges can be abused, particularly with a weapon as potent and elastic
as conspiracy. The Supreme Court has cautioned that:
We agree that indictments under the broad language of the general conspiracy statute
must be scrutinized carefully as to each of the charged defendants because of the
possibility, inherent in a criminal conspiracy charge, that its wide net may ensnare
the innocent as well as the culpable.331
b.
The Agreement.
The essence of conspiracy is the agreement to undertake a prohibited object 332 and some
reasonably foreseeable overt act in furtherance of the agreement.333 As I cover in more detail below,
under the general conspiracy statute considered here, the object must be the commission of a specific
offense (in what is referred to an offense conspiracy) or defrauding the Government (in what is
referred to as a defraud conspiracy).334 A good summary of the object element of the crime is:
The law of conspiracy requires agreement as to the object of the
conspiracy. This does not mean that the conspirators must be shown to have agreed
on the details of their criminal enterprise, but it does mean that the essential nature
of the plan must be shown.
Proof of the essential nature of the plan is required because the gist of the
offense remains the agreement, and it is therefore essential to determine what kind
of agreement or understanding existed as to each defendant. The importance of
making this determination cannot be overstated. Agreement is the essential evil at
which the crime of conspiracy is directed and it remains the essential element of the
crime. Nobody is liable in conspiracy except for the fair import of the concerted
purpose or agreement as he understands it. A conspirator's liability for substantive
crimes committed by his co-conspirators depends on whether the crimes were
committed in furtherance of the unlawful agreement or conspiracy. Similarly, the
admissibility against a defendant of a co-conspirator's declaration depends on
whether the declaration was made during the course and in furtherance of the
conspiracy. This determination can be made only after the scope of the agreement
has been defined. The question of whether single or multiple conspiracies have been
pled or proved depends on the nature of the agreement. Because overt acts are acts
to effect the object of the conspiracy, they are defined by reference to the
conspiratorial agreement. In addition, when questions arise concerning matters such
as venue, or the statute of limitations, which depend on the formation of the
agreement or the occurrence of overt acts, it becomes crucial, to determine the
331
Dennis v. United States, 384 U.S. 855, 859 (1966).

United States v. Rosenblatt, 554 F.2d 36, 38 (2d Cir. 1977).
333
United States v. Recio, supra, citing inter alia Iannelli v. United States, 420 U.S. 770,
777 (1975); see Pinkerton v. United States, 328 U.S. 640 (1946).
334
See CTM 23.02 (2008 ed.).
332
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scope of the conspiratorial agreement. Finally, the punishment that may be imposed
under 371, for a conspiracy to commit an offense against the United States,
depends on whether the object of the conspiracy is a felony or a misdemeanor. In
order to make this determination, specificity with respect to the object of the
conspiracy is essential.335
Finally, with regard to the agreement, it should go without saying that the Government has
to prove beyond a reasonable doubt that the defendant actually entered the conspiratorial agreement
and participated in the conspiracy. Yet, for dubious reasons, the notion crept into the law that
[Once a conspiracy is shown, only slight evidence is needed to link another defendant with it.336
Other formulations of that notion were that only a slight connection between the defendant and
the conspiracy need be shown or that evidence of the connection need not [be] overwhelming
evidence. The notion obscures the fundamental requirement that the Government must prove the
defendants guilt beyond a reasonable doubt and thus must prove the defendants entry into the
agreement and participation in the conspiracy beyond a reasonable doubt. The Second Circuit
recently succinctly rejected the notion, reasoning succinctly:
The not overwhelming evidence or slight evidence formulation risks
misleading not only jurors but district and appellate courts reviewing post-verdict
challenges as to the sufficiency of the evidence. The slight evidence formulation
may lead juries and reviewing courts improperly to focus on simply the quantity of
evidence of a defendant's participation in a conspiracy rather than the quality of that
evidence (whether quantitatively extensive or limited) viewed in the context of the
particular conspiracy at issue. The relevant inquiry - and the determinative inquiry
- is not whether a particular quantum of evidence has been presented but whether the
evidence that has been adduced establishes, in the mind of a reasonable juror, the
defendant's guilt beyond a reasonable doubt. Cf. United States v. Murray, 618 F.2d
892, 903 (2d Cir. 1980) (A single act may be sufficient for an inference that an
individual is involved in a conspiracy; the qualitative nature of the act viewed in the
context of the entire conspiracy determines whether that inference can be drawn in
a particular case. (emphasis added) (internal quotation marks and citations
omitted)).
We now hold that the not overwhelming evidence and slight evidence
formulations do not accurately describe the government's burden of proof in
conspiracy cases, and the use of these formulations should be discontinued. We note
that prior to filing, this opinion has been circulated to all members of this court.337
335
United States v. Rosenblatt, supra, p. 38 (citation omitted).

United States v. Huezo, 546 F.3d 174, 184-185 (2d Cir. 2009) (Newman, concurring),
cert. den. ___ U.S. ___, 130 S. Ct. 142 (2009), citing United States v. Marrakesh, 486 F.2d 918, 921
(2d Cir. 1973).
337
United States v. Huezo, 546 F.3d 174, 180 n. 2 (2d Cir. 2009), cert. den. ___ U.S.
___, 130 S. Ct. 142 (2009). This is a succinct and clear holding on an important issue found,
surprisingly in a footnote in the opinion. In the footnote, the majority opinion does note the very
336
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The courts willingness to retreat from error to honor our systems commitment to convict
only upon proof beyond a reasonable doubt is commendable. At one time, courts almost routinely
rubber-stamped some variation of the slight evidence formulation, but it now appears to me unlikely
that any court directly confronting the issue will be able to articulate a persuasive reason to bless and
perpetuate any version of the slight formulations.338
But, even with that retreat, the conspiracy charge puts pressure on that commitment to
convict only upon proof beyond a reasonable doubt in other ways that cannot easily be fixed even
when it is recognized. The risk is that a defendant will be convicted by mere proximity to the
conspiracy guilt by association with persons who were conspirators. In most cases, there is no
conspiratorial written agreement whereby the members and objects of the conspiracy are easily
identified with a fair degree of certainty (or beyond a reasonable doubt, if you will). A conspiracy
is usually proved by circumstantial evidence that requires connecting a number of dots whose
relationship may be uncertain and permits the jury to apply some guesses, called inferences to put
the best spin on them, as to the scope of the conspiracy in terms of membership and objects. In this
environment, guilt by association becomes a real concern for defense attorneys and perhaps, for
the overly aggressive prosecutor, an opportunity to be exploited. It is thus good, at a minimum, to
eliminate those notions that create undue risk that the jury will misperceive its task.
unusual step of saying that, prior to filing, the opinion had been circulated to all the judges of the
Second Circuit because of that holding; the conclusion is inescapable that the consensus on the
entire court is consistent with that holding. The majority opinion notes its agreement with Judge
Newmans concurring opinion in which Judge Newman at length reconstructs the validity and
dubious history of the various slight formulations. Judge Newman gives appropriate credit to
Judge Easterbrooks earlier leading opinion in United States v. de Ortiz, 883 F.2d 515, 524 (7th Cir.
1989) (Easterbrook, J., concurring), rehg. granted and judgment vacated on other grounds, 897 F.2d
220 (7th Cir. 1990). Judge Newman concludes (p. 189 n. 10):
I have written at some length in the hope that henceforth the quantitative adjectives
"slight" or "not overwhelming" or other variations will not be repeated either in
appellate opinions or in jury instructions with reference to the evidence sufficient to
prove beyond a reasonable doubt a defendant's participation in a conspiracy. The
agreement of Judges Walker and Sotomayor with this opinion (despite the latter's
dissent on the merits) gives me cause for considerable optimism. n10
n10 This opinion has been circulated to all of the judges of this Court prior to filing.
338
Notwithstanding, the DOJ CTM (2008 ed.) provides in 23.05[2] Proof of
Membership, the following: Although the government must prove that a defendant was a member
of a conspiracy, this requirement may be satisfied by a showing of even a slight connection to the
conspiracy, so long as the connection is proven beyond a reasonable doubt. This is a better
formulation than some formulations because it does end with the requirement of proof beyond a
reasonable doubt. But, as Judges Easterbrook and Newman have noted (see Ortiz and Huezo case
discussions in preceding footnote), the formulation risks denigrating the requirement that the
Government prove its case beyond a reasonable doubt. I would think that the Government would
be pretty stupid to submit jury instructions with those slight formulations in them. It seems to me
that, if the Government has a case against the defendant, it can win the case without that unnecessary
risk of confusion.
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c.
Conspiracy is Independent of the Substantive Offense.
The crime of conspiracy is independent of any substantive offense that is the object of the
conspiracy and does not require that any substantive offense have even been committed.339 And,
even if the substantive offense that is the object of the conspiracy is committed, the conspiracy does
not merge into that the substantive offense; the substantive offense and the conspiracy to commit
the offense can be charged independently or together.340 Indeed, a conviction of conspiracy may be
obtained even if, at the time of the agreement and overt act, the Government has defeated the
criminal object of the conspiracy.341
For both the substantive crime and the conspiracy to be tried, the Government will have to
prove (i) as to the conspiracy, the agreement and at least one overt act in furtherance that was
reasonably foreseeable within the scope of the agreement and (ii) as to the substantive offense for
one who did not commit the offense and thus can only be liable because of the conspiracy, that the
offense was committed and that the offense committed was reasonably foreseeable in furtherance
of the conspiratorial agreement.342 Notice that the act for which the co-conspirator may be tagged
may not be one that he actually knew about; the only requirement is reasonable foreseeability.
There must be at least two culpable parties to the agreement. Hence an agreement solely
between a defendant and a Government agent in a sting operation will not support a conspiracy
charge.343
Notwithstanding the foregoing, under Whartons rule, if the substantive offense that is the
object of the alleged conspiracy requires more than one actor then a separate conspiracy to commit
that offense cannot be charged unless more than the statutory minimum number of actors are
involved.344 This is a judicial presumption in the absence of legislative intent to the contrary.345
339
Salinas v. United States, 522 U.S. 52, 65 (1997); see United States v. Felix, 503 U.S.
378, 391-92 (1992).
340
Ianelli v. United States, 420 U.S. 770, 781-2 (1974), citing Pinkerton v. United States,
328 U.S. 640(1946) [see , 643 n.11]; United States v. Felix, 503 U.S. 378, 391-92 (1992).
341
United States v. Recio, supra.
342
The latter point may be stated in the negative. A person may be a member of the
conspiracy but will not be charged with respect to a substantive offense that was not in fact done
in furtherance of the conspiracy, did not fall within the scope of the unlawful project, or was merely
a part of . . . the plan which could not be reasonably foreseen as a necessary or natural consequence
of the unlawful agreement. Pinkerton v. United States, 328 U.S. 640, 647-8 (1946).
343
Rogers v. United States, 340 U.S. 367, 375 (1951); United States v. Giry, 818 F.2d
120, 125 (1st Cir. 1987), cert. denied, 484 U.S. 855 (1987); United States v. Barnes, 604 F.2d 121,
161 (2d Cir. 1979), cert. denied, 446 U.S. 907 (1980).
344
Iannelli v. United States, 420 U.S. 770, 773 n.5 (1975). Wharton's Rule is named for
an early author articulating the rule. Francis Wharton, A Treatise on the Criminal Law of the United
States 110, 491 (1846). The current formulation of the rule is (Charles E. Torcia, Wharton's Criminal
Law 684 (3d ed. 1996)):
An agreement between two persons to commit an offense does not constitute
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d.
Scope of the Conspiracy.
The prohibited conspiratorial agreement is, after all, an agreement. An agreement requires
essential terms and definiteness to be an agreement.346 The terms of agreement commonly focused
on are the object and the agreed upon means to achieve the object. These are often conflated in the
concept of the scope of the agreement. Scope of the conspiracy is a key concept in applying
conspiracy theory. Scope is important for two reasons. First, all conspirators are liable for
substantive crimes within the scope of the conspiracy. Second, at least one overt act within the
scope of the conspiracy is required. Similarly, overt acts within the scope of the conspiracy will
refresh the statute of limitations for prosecution of the conspiracy.
(1)
Pinkerton - Vicarious Substantive Offense

Liability.
In United States v. Pinkerton, 328 U.S. 640 (1946), the Court held that a conspirator can be
guilty of both the conspiracy (a separate crime as noted above) as well as any separate substantive
offense committed within the scope of the conspiracy even if that conspirator did not commit the
substantive offense and did nothing other than join the conspiracy.347 Pinkerton liability may be
divided into three categories for analysis: (1) where the substantive offense is the object of the
conspiracy, (2) where the substantive offense facilitates the object of the conspiracy, and (3) where
conspiracy when the target offense is so defined that it can be committed only by the
participation of two persons. Thus, there can be no conspiracy between the giver and
receiver of a bribe; the giver and receiver of an illegal rebate; a prostitute and a pimp
or panderer; the parties to adultery; or a fugitive from justice and the person
concealing him.
This formulation speaks of two, but there is no reason that more than two could invoke the rule if
more than two persons are required for the underlying substantive offense.
345
Ianelli, at p. 782.
346
Otherwise, in contract jargon, it is an illusory agreement. In the notable example of
an illusory agreement from the great Hardy Dillard, former contracts professor and dean of my law
school, the University of Virginia School of Law: A young beau promises a young lass upon whom
he is lavishing attention for obvious reasons, Ill marry you if I choose to. No contract - no
agreement to marry, and any consideration the lass tenders for that noncommitment is irrelevant.
The key terms here, at least an unconditional promise does not exist.
347
Ianelli v. United States, 420 U.S. 770, 777-778 (1974), citing Pinkerton, inter alia.
For a very good recent discussion of Pinkerton liability, see Mark Noferi, Towards Attenuation: A
New Due Process Limit on Pinkerton Conspiracy Liability, 33 Am. J. Crim. L. 91 (2006); and
Benjamin E. Rosenberg, Several Problems in Criminal Conspiracy Laws and Some Proposals for
Reform, 43 No. 4 Crim. L. Bull. 1 (July-Aug. 2007). . For a justification of Pinkerton based on its
ability to incentivize a co-conspirator to cooperate and help convict the others by making a deal with
the prosecution, see Katyal, pp. 1372-1375.
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the substantive offense is not itself an object or facilitator of the conspiracy, its commission was
within the scope of the conspiracy and reasonably foreseeable.348
In terms of foreseeability and the purposes of imposing substantive liability, the first and
second categories are obvious. The third category, by contrast, turns upon a concept that may or may
not be so obvious.349 Lets take examples on the extremes to illustrate. A and B enter a conspiracy
to commit armed robbery. They expressly agree that they will not fire their weapons unless
someone else shoots first. During the robbery, despite the express scope of the agreement, A shoots
the victim who dies as a result. Is B liable for the murder A committed? I think most of us would
see the nexus and answer the question yes. What if, however, Bs only involvement was to drive
A to a house for the purposes of A breaking in to commit a burglary while B waited outside, without
B even knowing that A had a gun. Was the murder reasonably foreseeable for purposes of tagging
B with criminal liability for the murder? Is reasonable foreseeability the only consideration, i.e.,
is there some notion of proportionality to the conduct the conduct of B in this example and
perhaps even Due Process to the unmitigated extension of the full bore Pinkerton concept?350 Is the
notion of reasonable foreseeability sufficiently flexible to offer the courts sufficient wiggle room
to avoid the worst instances of the Pinkerton concept? Does the notion and constitutional
requirement of Due Process require some nexus between the crime and the individuals unique
culpability under the facts?351 These are big issues that have troubled courts as prosecutors have
attempted to press the conspiracy advantage to its maximum; some courts and commentators now
recognize that the Government can press the concept too far.
Courts often address this concern in applying reasonable foreseeability limitation on
liability.352 The requirement of reasonable foreseeability gives the courts and the juries some wiggle
348
United States v. Alvarez, 755 F.2d 830, 850 (11th Cir. 1985), cert. denied 474 U.S.
905 (1985).
349
See Mark Noferi, supra, arguing that this limitations is a Due Process limitation.
Cf. Kennedy v. Louisiana, 554 U.S. 945 (2008) (death sentence for child rapist not
involving death was disproportionate and hence unconstitutional under the Cruel and Unusual
Punishment Clause of the Eight Amendment).
351
E.g., United States v. Collazo-Aponte, 216 F.3d 163, 196 (1st Cir. 2000) (We agree
with appellant that due process constrains the application of Pinkerton where the relationship
between the defendant and the substantive offense is slight. (quoting United States v. Castaneda,
9 F.3d 761, 766 (9th Cir. 1993)).
352
Alex Kreit, Vicarious Criminal Liability and the Constitutional Dimensions of
Pinkerton, 57 Am. U. L. Rev. 585, 612 (2008). Note that, as typically articulated, the rule requires
reasonable foreseeability to the scope of the conspiracy. Some jury instructions, however, leave
off the reasonable limitation. For example, the Fifth Circuit Pattern Jury Instruction 2.22
provides:
A conspirator is responsible for offenses committed by another [other] conspirators]
if the conspirator was a member of the conspiracy when the offense was committed
and if the offense was committed in furtherance of, or as a foreseeable consequence
of, the conspiracy.
The reasonable limitation omitted from this pattern is critical for reasons that shall become apparent
350
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room to justify rejecting Pinkerton liability where the defendants relationship to the crime
committed is too remote. Moreover, the requirement that the crime be committed within the scope
of the conspiracy also offers some wiggle room to reject tenuous Pinkerton liability. But, the
problem still remains that there is no clear guidance on when these wiggle room opportunities should
be exercised. It becomes ultimately a gut check on the part of the judge or jury as to whether the
defendant has sufficient culpability to be held vicariously liable and, if not, to articulate some reason
to conclude that the criminal act by others was not within the scope of the conspiracy or was not
reasonably foreseeable. I will leave it there, because the subject is too large to address in more detail
here, so I cite further reading in the footnotes.353
I do offer, however, one short example to illustrates how one court dealt with this issue in
a Klein context.
The Eleventh Circuit has predicated that This tax purpose must be the object of a Klein
conspiracy, and not merely a foreseeable consequence of some other conspiratorial scheme. Citing
Dennis v. United States, 384 U.S. 855, 861 (1966) and noting (n. 17) that Were it otherwise, the
robbery of a bank by two or more persons who subsequently fail to report this income on their tax
returns would be a tax conspiracy.354
It is interesting to note that, in formulating the Sentencing Guidelines which have different
policies than substantive liability, the drafters recognized some of the complaints about full bore
Pinkerton liability and gave sentencing judges some work around the more egregious problems in
Pinkerton to address the unique culpability in fact of the defendant being sentenced.355
Finally, students should observe the overlap between the Pinkerton doctrine and accomplice
liability (which I introduced in discussing accomplice liability under 18 U.S.C. 2 ( aiding and
abetting) above. Aiding and abetting makes an accomplice a principal for the crime committed by
in the text. I think the instruction is wrong to have omitted that limitation. Remember, pattern jury
instructions are not the law and can be wrong.
353
See Mark Noferi, supra; and Alex Kreit, Vicarious Criminal Liability and the
Constitutional Dimensions of Pinkerton, 57 Am. U. L. Rev. 585 (2008). Professor Kreit notes, in
Pinkerton, the substantive crimes and the goal of the scope of the conspiracy were one in the same.
Id. 594. From the language of the case, however, the other two types of vicarious liability have been
derived. And, Professor Kreit notes, the real statutory analog for vicarious liability is aiding and
abetting / accomplice liability in 18 U.S.C. 2; yet Congress did not impose liability in such
sweeping terms to include reasonably foreseeable crimes. Id. 596.
It is interesting to note that, in formulating the Sentencing Guidelines which have different
policies than substantive liability, the drafters recognized some of the complaints about full bore
Pinkerton liability and gave sentencing judges some work around the more egregious problems in
Pinkerton to address the unique culpability in fact of the defendant being sentenced. See Noferi,
pp. 113-116.
354
United States v. Adkinson, 158 F.3d 1147, 1155 (11th Cir. 1998).
355
See Mark Noferi, supra, pp. 113-116.
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another person. Pinkerton does the same thing, as the Supreme Court itself noted in Pinkerton356 and
other courts have also noted, but accomplice liability does not encompass the reasonably foreseeable
crimes by others. One context in which that relationship may support similar scope of these
different concepts is whether Pinkerton liability can attach only if the conspiracy is charged in the
indictment and guilt for the conspiracy is found. As noted above, there is no requirement that aiding
and abetting liability be charged in the indictment, thus permitting the judge to charge the jury that
a person who aids and abets is a principal even if aiding and abetting is not charged. The courts are
split as to whether Pinkerton liability can attach for a conspiracy that is not charged in the indictment
or, presumably, where jury acquits for the conspiracy charged in the indictment.357
(2)
Overt Acts.
For the general conspiracy statute considered here, an overt act in furtherance of the
conspiracy is required. An overt act can be a misdemeanor crime if committed in furtherance of the
conspiracy,358 but an overt act itself need not be illegal. Most importantly for present purposes, overt
acts within the scope of the conspiracy if committed after the underlying substantive offense can
refresh the statute of limitations for the conspiracy and even the underlying substantive offense.
In Grunewald v. United States, 353 U.S. 391 (1957), the Government asked the Court to
hold that concealing the substantive crime after its commission was within the implied scope of the
conspiracy to commit the substantive crime and hence the overt acts of concealment set the statute
of limitations for prosecution. The Court rejected that attempt:
In effect, the differentiation pressed upon us by the Government is one of
words rather than of substance. In Krulewitch [Krulewitch v. United States, 336
U.S. 440 (1949)] it was urged that a continuing agreement to conceal should be
implied out of the mere fact of conspiracy, and that acts of concealment should be
taken as overt acts in furtherance of that implied agreement to conceal. Today the
Government merely rearranges the argument. It states that the very same acts of
concealment should be used as circumstantial evidence from which it can be inferred
that there was from the beginning an actual agreement to conceal. As we see it, the
two arguments amount to the same thing: a conspiracy to conceal is being implied
from elements which will be present in virtually every conspiracy case, that is,
secrecy plus overt acts of concealment. There is not a shred of direct evidence in this
record to show anything like an express original agreement among the conspirators
356
328 U.S. at 647.

United States v. Zackery, 494 F.3d 644 (8th Cir. 2007), cert. denied, 552 U.S. 1261
(2008) (holding that the conspiracy need not be charged, and citing contrary authority at p. 647); see
Christi Gannon, Case Comment: Criminal Law -- Eighth Circuit Misapplies Pinkerton By Holding
Conspiracy Need Not be Charged -- United States v. Zackery, 494 F. 3d 644 (8th Cir. 2007), 13
Suffolk J. Trial & App. Adv. 253 (2008) (arguing that a specific finding of guilt as to the conspiracy
is a predicate for Pinkerton liability for the substantive offense).
358
Meredith v. United States, 685 F.3d 814, 824-825 (9th Cir. 2012).
357
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to continue to act in concert in order to cover up, for their own self-protection, traces
of the crime after its commission.
Prior cases in this Court have repeatedly warned that we will view with
disfavor attempts to broaden the already pervasive and wide-sweeping nets of
conspiracy prosecutions. The important considerations of policy behind such
warnings need not be again detailed. See Jackson, J., concurring in Krulewitch v.
United States, supra. It is these considerations of policy which govern our holding
today. As this case was tried, we have before us a typical example of a situation
where the Government, faced by the bar of the three-year statute, is attempting to
open the very floodgates against which Krulewitch warned. We cannot accede to the
proposition that the duration of a conspiracy can be indefinitely lengthened merely
because the conspiracy is kept a secret, and merely because the conspirators take
steps to bury their traces, in order to avoid detection and punishment after the central
criminal purpose has been accomplished.359
Consider the result if this overt act analysis had been made under the reasonable
foreseeability test noted above. Certainly, in a very real sense, it is reasonably foreseeable that each
of the conspirators would take steps after the completion of the main substantive offense object of
the conspiracy to conceal the offense as well as the conspiracy to commit the offense. But, as the
Court made abundantly clear, the overt act for such subsequent hiding has to be within the actual
scope of the conspiracy and not a reasonable foreseeable consequence.360
(3)
Hub and Spoke Conspiracy.
Some multi-participant schemes involve a series of separate agreements, thus separate

conspiracies, although they may have some common participants. The overarching illegality of this
type is called a hub and spoke conspiracy where there is no rim to connect the spokes; without the
rim connecting the spokes, there are separate conspiracies (the spokes) without sufficient connection
between the spokes via a rim to treat the overall conduct as a single overarching conspiracy.361
359
353 U.S. at 403-405.

One related issue is whether the jury must be instructed to agree upon one specific
overt act committed in furtherance of the conspiracy for a verdict of guilty. United States v.
Kozeny, 667 F.3d 122 (2d Cir. 2011) (answering the question no and noting that there is no real
circuit split on the issue).
361
The Supreme Court invoked the hub and spoke metaphor in the seminal decision of
Kotteakos v. United States, 328 U.S. 750, 755 (U.S. 1946), where the proof showed separate spokes
meeting in a common center, though, we may add, without the rim of the wheel to enclose the
spokes. The spokes are the separate agreements or conspiracies without sufficiently commonality
other than the hub to join them together in a single overarching conspiracy. United States v.
Chandler, 388 F.3d 796, 808 (11th Cir. Fla. 2004). See also Blumenthal v. United States, 332 U.S.
539, 558-559 (1948) distinguishing Kotteakos and finding a single conspiracy where (i) the parties
involved knew or must have known that others unknown to them were sharing in so large a
project. and (ii) the parties, by their separate agreements . . . became parties to the larger common
360
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While it is easy to conceptualize the distinction between a single common conspiracy and separate
conspiracies, the facts often blur the lines and make close calls, sometimes which could go either
way. We dealt elsewhere the notion of slight evidence linking a person to a conspiracy;362 but this
particular single-multiple conspiracy distinction is perhaps where that notion can create particular
mischief because it might sweep in parties at the margins of the conspiratorial agreement that the
particular alleged conspirator joined.
I think it all goes back to scope a key conspiracy concept. Was the scope of the conspiracy
that a conspirator joined broad enough realistically to encompass the participation of others, known
and unknown, to the conspirator. If so, that conspirator joined a common conspirator where he or
she has Pinkerton liability for the acts of the conspirators acting within the scope of the conspiracy
in other words, there is a single conspiracy. If not, the conspirator will not be held to have joined
a conspiracy with the players at the ends of the spokes but will be liable only for the conspirators
on the same spoke and at the hub.
e.
Offense Conspiracy.
The first of the two types of conspiracy described in 371 is a conspiracy to commit an
offense against the United States. In the context of this text book, the offense that was the object
of an alleged conspiracy would usually be a tax crime, such as 7201, 7206(1) and 7206(2).
Often the person charged with the conspiracy is not the person liable for the tax but those
who, the Government alleges, conspired with others to understate or underpay the tax liability of
another, file a false return, etc. What level of mens rea is required to convict the person of the
offense conspiracy? We studied above that substantive tax offenses have a willfulness requirement
which is generally a stringent form of the criminal mens rea requirement. See e.g., the Cheek case.
For example, in the context of a similar willfulness element in offense for violation of the currency
transaction report requirements, the Supreme Court held that willfulness element required that
Government prove the defendant knew that the conduct was not just wrong but criminal.363 Section
371 does not itself contain a willfulness requirement, but the Supreme Court held in Ingram v.
United States, 360 U.S. 672, 678 (1959), that willfulness was required for conviction of an offense
conspiracy to commit a crime (there a tax crime) which contained a willfulness requirement. Thus,
for conviction of the offense conspiracy, the defendant would have to know that the agreement was
to commit an act that would intentionally violate a known legal duty.
In Ingram, the four defendants 2 owners (Ingram and Jenkins) and 2 employees (Smith and
Law) participated in the conduct and concealment of lottery operations that were illegal under state
law. The 2 owners failed to pay the federal wagering taxes they owed by virtue of the operations.
The other 2, as employees, were not liable for the taxes. The Government indicted and convicted
all 4 of conspiracy to evade the taxes. In addressing the conspiracy charges against the 2 employees,
plan, joined together by their knowledge of its essential features and broad scope, though not of its
exact limits, and by their common single goal.
362
363
Ratzlaf v. United States, 510 U.S. 135 (1994).
- 184 -
the Court said (pp. 678 - 680, emphasis supplied and footnotes and some citations omitted for easier
readability):
Conspiracy to commit a particular substantive offense cannot exist without
at least the degree of criminal intent necessary for the substantive offense itself.
The substantive offense which Smith and Law were accused of conspiring to commit
was the willful evasion of federal taxes, an offense which, even presuming
knowledge of the tax law, obviously cannot be committed in the absence of
knowledge of willfulness. Spies v. United States, supra. * * * *.364
Indulging, as of course we must, in that view of the evidence most favorable
to the Government, we simply cannot discern adequate foundation in the present
record for a finding that Smith and Law had such knowledge of Ingram's and Jenkins'
wagering tax liability. The record is completely barren of any direct evidence of such
knowledge. It was not shown, for example, that any reference had ever been made
by any of the petitioners to possible tax liability, or that they had filed a return or
paid a tax in previous years. The Government relied instead upon evidence which,
it asserts, circumstantially proved the requisite knowledge on the part of Smith and
Law. These circumstances were simply the intimate connection of Smith and Law
with the operation of the lottery itself, their cooperation in conducting it secretly, and
their apparent knowledge that it was conducted at a profit. The Government points
out that not only would payment of the taxes have decreased the profits to be derived
from operation of the lottery, but in addition would have required registration,
including the names and addresses of the bankers and writers, with the local internal
revenue office and the posting of a wagering tax stamp at the place of business. 26
U. S. C. (Supp. V) 4412, 6806 (c). The information contained in the registration
would have been available to local law enforcement officials. 26 U. S. C. (Supp. V)
6107.
Yet these circumstances actually are colorless as to the vital issue of
knowledge on the part of Smith and Law that their superiors owed federal wagering
taxes. Certainly the secrecy of the operation did not go to show that knowledge.
This is not a case where efforts at concealment would be reasonably explainable only
in terms of motivation to evade taxation. Here, the criminality of the enterprise
under local law provided more than sufficient reason for the secrecy in which it was
conducted. A conspiracy, to be sure, may have multiple objectives, and if one of its
objectives, even a minor one, be the evasion of federal taxes, the offense is made out,
though the primary objective may be concealment of another crime. See Spies v.
United States, supra, at 499. But the fact that payment of the federal taxes by Ingram
and Jenkins might have resulted in disclosure of the lottery and subsequent
prosecution of Smith and Law by local authorities would permit an inference that
concealment of the lottery was motivated by a purpose to evade payment of federal
taxes only if, independently, there were proof that Smith and Law knew of the tax
364
United States v. Ingram, 360 U.S. 672, 677 (1959) (footnote omitted).
- 185 -
liability. Evidence that Smith and Law might have wanted the taxes to be evaded if
they had known of them, and that they engaged in conduct which could have been
in furtherance of a plan to evade the taxes if they had known of them, is not evidence
that they did know of them.
What was said in Direct Sales Co. v. United States on behalf of a unanimous
[Supreme] Court is of particular relevance here:
Without the knowledge, the intent cannot exist. . . .
Furthermore, to establish the intent, the evidence of knowledge must
be clear, not equivocal. . . . This, because charges of conspiracy are
not to be made out by piling inference upon inference, thus
fashioning . . . a dragnet to draw in all substantive crimes. 319 U.S.,
at 711.
Smith and Law were not liable for the wagering tax. They could not,
therefore, have been convicted of the crime which they were charged with having
conspired to commit. To sustain their conviction on this record would make of the
crime of conspiracy just that dragnet to draw in all substantive crimes against
which the Court warned in Direct Sales.
The Court in Ingram reversed the conviction of the employees because of lack of proof of their
knowledge of the tax liability but sustained the conviction of the two owners of the business because
there was sufficient proof of their knowledge.365
Ingram thus establishes that, for the offense conspiracy, two intent elements are required.
As noted by a Fifth Circuit decision:366
Conspiracy actually has two intent elementsintent to further the unlawful purpose
and the level of intent required for proving the underlying substantive offense. See
2 Wayne R. LaFave & Austin W. Scott, Jr., Substantive Criminal Law 12.2(c)(1)
(2003); United States v. Alvarez, 610 F.2d 1250, 1255 (5th Cir. 1980) ("Conspiracy
is, however, more complex because it involves two elements of intent that shade into
each other: each party must have intended to enter into the agreement and the
schemers must have had a common intent to commit an unlawful act."). fn16
365
See also United States v. Feola, 420 U.S. 671, 686 (1975) ("in order to sustain a
judgment of conviction on a charge of conspiracy to violate a federal statute, the Government must
prove at least the degree of criminal intent necessary for the substantive offense itself.").
366
United States v. Brooks, 681 F.3d 678, 699 (5th Cir. 2012) (citing 2 Wayne R.
LaFave & Austin W. Scott, Jr., Substantive Criminal Law 12.2(c)(1) (2003); United States v.
Alvarez, 610 F.2d 1250, 1255 (5th Cir. 1980) ("Conspiracy is, however, more complex because it
involves two elements of intent that shade into each other: each party must have intended to enter
into the agreement and the schemers must have had a common intent to commit an unlawful act.").
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n16 Although the two intents are separate, they often functionally collapse into a
single intent. United States v. Chagra, 807 F.2d 398, 401 (5th Cir. 1986). Thus,
oftentimes, it is only necessary for the government to prove the level of intent
required for proving the underlying substantive offense. United States v. Feola, 420
U.S. 671, 686 (1975); United States v. Dadi, 235 F.3d 945, 950 (5th Cir. 2000).
What happens if the underlying tax liability is so uncertain that, under the James / Garber
/ Dahlstrom line of cases a charge for the underlying tax offense would fail? Ingram holds that all
charges for the offense conspiracy would fail also.
f.
Defraud Conspiracy - the Klein Conspiracy.

(1)
Introduction.
Conspiracies to defraud the IRS are commonly referred to as Klein conspiracies, based on
the leading Second Circuit case of United States v. Klein.367 In the criminal arena generally and in
the tax arena, specifically, the Klein conspiracy is a term of art that is used and must be understood
without further explanation.
I can only introduce the student in this text to the implications and nuances of the defraud
conspiracy. The student will perceive that I and others have been troubled by the breadth of the
criminal conduct potentially within the scope of the defraud clause at least as imagined by some
courts and the Government. For more study in this area, I direct the student to the leading scholarly
discussion, which, while old, still has the most to say on the problems in the area. Abraham S.
Goldstein, Conspiracy to Defraud the United States, 68 Yale L. J. 405 (1959) (hereinafter cited
as Goldstein, with an appropriate page number).368
(2)
It Depends on What Defraud Means.
The statute requires a conspiracy to defraud the United States or an agency. In ordinary
usage, defraud means a taking of something of value through fraud,369 and generally the criminal
367
247 F.2d 908 (2d Cir. 1957), cert. denied, 355 U.S. 924 (1958). See United States
v. Alston, 77 F.3d 713, 717 n. 13 (3d Cir. 1996).
368
I also direct others to my article John A. Townsend, Is Making the IRS's Job Harder
Enough?, 9 Hous. & Bus. Tax L.J. 260 (2009). This article deals with the overlapping obstructive
crimes of tax obstruction ( 7212) which I discuss earlier in the text and the defraud conspiracy
which I discuss here in the text. In relevant part, in the defraud conspiracy portion of the article, I
try to bring the research current. However, I have to say that, in terms of sheer force of reasoning,
I do not come close to Professor Goldsteins article.
369
Defraud is defined in The American Heritage Dictionary of the English Language:
Fourth Edition 2000 as follows: To take something from [someone] by fraud; swindle: defrauded
the immigrants by selling them worthless land deeds. Fraud is defined as: Fraud: 1. A deception
deliberately practiced in order to secure unfair or unlawful gain. 2. A piece of trickery; a trick. 3a.
One that defrauds; a cheat. b. One who assumes a false pose; an impostor. These definitions are
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statutes adopt that definition.370 There is nothing in the statute or the legislative history371 of the
conspiracy statute that suggests that Congress meant anything other than this ordinary usage of the
term. In a tax setting, this ordinary usage would suggest that the taking of taxes otherwise due and
owing. But, in the conspiracy statute, the word defraud is interpreted more broadly.372
In Haas v. Henkel,373 a person named Holmes was an employee of the Bureau of Statistics
within the Department of Agriculture. In that capacity he obtained information in advance of
publication. Two others, including Haas, obtained that information from Holmes in advance of its
publication. 317 The indictment alleged that the defendants thereby "defrauded the United States
by defeating, obstructing and impairing it in the exercise of its governmental function in the regular
and official duty of publicly promulgating fair, impartial and accurate reports concerning the cotton
crop." 318 The Supreme Court held:
But it is not essential that such a conspiracy shall contemplate a financial loss
or that one shall result. The statute is broad enough in its terms to include any
conspiracy for the purpose of impairing, obstructing or defeating the lawful
function of any department of Government. Assuming, as we have, for it has not
been challenged, that this statistical side of the Department of Agriculture is the
exercise of a function within the purview of the Constitution, it must follow that any
conspiracy which is calculated to obstruct or impair its efficiency and destroy the
value of its operations and reports as fair, impartial and reasonably accurate, would
be to defraud the United States by depriving it of its lawful right and duty of
promulgating or diffusing the information so officially acquired in the way and at the
time required by law or departmental regulation. That it is not essential to charge or
prove an actual financial or property loss to make a case under the statute has been
more than once ruled. 374
from the internet edition on bartleby.com.

370
McNally v. United States, 483 U.S. 350, 358 n 8 (1987). For example, United States
v. Pierce, 224 F.3d 148 (2d Cir. 2000) (In the context of mail fraud and wire fraud, the words to
defraud commonly refer to wronging one in his property rights by dishonest methods or schemes,
and usually signify the deprivation of something of value by trick, deceit, chicane or
overreaching. [citations omitted]; United States v. Ballistrea, 101 F.3d 827, 831 (2d Cir. 1996).).
In other words, it is the taking of money or something of value.
371
Professor Goldstein notes that the original statutes containing the key language and
morphing into the current defraud conspiracy statute was a statute criminalizing conspiracies to
defraud the United States of revenue. Goldstein, pp. 417-418. Thus, it was narrowly drawn to deal
with conspiracies related to tax matters and not general criminal matters as it now appears.
Professor Goldstein also notes that there is no pertinent legislative history. Id. The Supreme Court
in Tanner v. United States, 482 U.S. 107, 131 (1987) described the legislative history as stingy.
372
See Professor Goldsteins article generally.
373
Haas v. Henkel, 216 U.S. 462, 476-80, 30 S. Ct. 249, 252-54 (1910).
374
Id. at 479-80.
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Although the context of Haas was obtaining information by bribe which was clearly
fraudulent under the traditional meaning of the word, the sweeping language was that the defraud
conspiracy includes any action the object of which was to impair or impede the actions of a
government agency. (See the bold face language in the quote.) This language addressing a situation
beyond the facts presented suggested that the object to gain property by fraud - normally connoted
by the statutory word defraud - or even any skullduggery beyond an attempt to impede is not
required.
Realizing that this interpretation of Haas was too broad, in Hammerschmidt v. United States,
265 U.S. 182 (1924), the Court said (emphasis supplied):
To conspire to defraud the United States means primarily to cheat the
Government out of property or money, but it also means to interfere with or
obstruct one of its lawful governmental functions by deceit, craft or trickery, or
at least by means that are dishonest. It is not necessary that the Government shall
be subjected to property or pecuniary loss by the fraud, but only that its legitimate
official action and purpose shall be defeated by misrepresentation, chicane or the
overreaching of those charged with carrying out the governmental intention.375
In a major recent opinion, a Second Circuit panel has questioned even the Hammerschmidt
blessing of the defraud conspiracy beyond what the word defraud means (see the opening paragraph
of this section).376 The Court noted that the judicial expansion might be an illegal judicial creation
of a crime, but said that the only courts that might address the issue are the Supreme Court and
perhaps the Second Circuit en banc because the expansion had been blessed in a number of Second
Circuit cases, including Klein.377 So, at least at this juncture, Hammerschmidt sets the scope of the
defraud conspiracy, including its Klein tax iteration.378
375
Hammerschmidt, at p. 188. In McNally v. United States, 483 U.S. 350, 358 n 8

(1987), the Court noted in dictum that the term defraud as used in the wire fraud statute was
interpreted more narrowly than the term in the defraud conspiracy. Although dictum in McNally,
just two days before the McNally decision, the Court declined to reconsider the broader scope of
section 371. Tanner v. United States, 483 U.S. 107, 128 (1987). See United States v. Tuohey, 867
F.2d 534, 537 (9th Cir. 1989) (Despite these similarities [in use of the word defraud in the two
criminal sections], the key word defraud now has a fundamentally different meaning in a
conspiracy case than it does in a mail fraud prosecution.).
376
United States v. Coplan, ___ F.3d ___, 2012 U.S. App. LEXIS 24613 (2d Cir.
11/29/12).
377
For more of my thoughts on the subject, see Coplan #1 - Panel Questions Validity
of Klein Conspiracy (Federal Tax Crimes Blog 12/1/12).
378
For some wishful thinking about the potential demise of the expansive scope of the
Hammerschmidt defraud conspiracy and its Klein tax iteration, see Shamik Trivedi, Is Klein on the
Ropes?, 2012 TNT 244-1 (12/19/12) and my comments on that article, Further on the Second Circuit
Detour on the Interpretation of the Defraud / Klein Conspiracy (Federal Tax Crimes Blog 12/18/12).
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Hammerschmidt establishes that the defraud conspiracy has a more limited application that
the language of Haas suggested when read out of its context.379 The object of the defraud conspiracy
must be to (1) interfere with or obstruct a government function, in this case the IRS function (2) by
means of deceit, craft, trickery or dishonesty.380 For convenience I will refer to this latter element
as the deceit element of the defraud conspiracy. An intent to defeat or impair a Government function
without deceit will not suffice. Requiring the Government to square the corner on this deceit
element is critical to keeping the defraud conspiracy within reasonable boundaries.381 Indeed, the
deceit element proclaimed in Hammerschmidt is the key to anchoring the defraud conspiracy in the
statutory text defraud which should require at a core level some form of dishonesty or deceit.
Take an extreme example to illustrate the issue, assume that a tax practitioner and the
persons for whom he prepares returns writes the Commissioner of Internal Revenue a letter
requesting that those persons returns not be audited and, in order to insure that they not be audited,
request that the IRS computers be programmed to prevent any type of audit, random or otherwise.
Have they agreed to attempt to interfere with the normal functions of the IRS? Yes. Have they
committed an overt act in furtherance of that agreement? Yes. They wrote the letter in every hope,
however unreasonable the hope, that it would result in disrupting the normal administration of the
IRS as to them. They did a perfectly legal, non-deceitful act with the intent to lower the audit
profile. Are they guilty of the crime of conspiracy? No.
379
United States v. Peltz, 433 F.2d 48, 51 (2d Cir. 1970), cert. denied, 401 U.S. 955
(1971) (in Hammerschmidt, the Court narrowed Haas).
380
It is interesting to note that this Hammerschmidt formulation echoes the formulation
in 1001, commonly called the False Statements crime. Section 1001(a)(2) and (3) criminalize false
statements and false documents provided executive, judicial or legislative branches. Subsection
(a)(1) more generally criminalizes conduct that falsifies, conceals, or covers up by any trick,
scheme, or device a material fact. It is perhaps not surprising that this echo is present because the
defraud conspiracy and Section 1001 are just iterations of the panoply of obstruction statutes, all of
which deal with some facet of obstruction. For the more generally applied obstruction statutes (18
U.S.C. 1503, 1505 and 1512(b) (discussed later in the text), the echo is present in there
requirement that the defendant act corruptly before there can be an obstruction.
381
Professor Goldstein says that the statutory terminology defraud the United States,
as interpreted by the Supreme Court, is too vague to be understood by the man of common
intelligence and should be held unconstitutional. See Goldstein, Conspiracy, p. 442. Professor
Goldstein says that it is unlikely that it will be held unconstitutional and that, instead, the courts are
likely to limit its scope to take out its more abusive potential. Goldstein, Conspiracy, pp. 442-3.
Of course, given its scope as interpreted, it is likely that the Government has exercised some
discretion to avoid extending the concept to the ultimate limit because the jails would fill with
involuntary guests and the courts would almost certainly push back with limitations the Government
may not want.
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United States v. Caldwell

998 F.2d 1056 (9th Cir. 1993)
KOZINSKI, Circuit Judge:
We consider whether conspiring to make the government's job harder is,
without more, a federal crime.
I
Patricia Caldwell was a bookkeeper for the Northwest Community Exchange.
The Exchange was a warehouse bank, a device people use to keep their financial
transactions secret. It used numbered accounts, promised to keep no records of
clients' transactions and vowed not to disclose information about the accounts to
third parties. The Exchange's ostensible goal was maintaining client privacy, but this
privacy also helped the Exchange's customers avoid paying taxes.
When you mess with the IRS, the IRS messes back. The government
eventually shut down NCE and arrested several of its customers and employees,
including Caldwell. Caldwell was convicted by a jury of conspiring to defraud the
United States in violation of 18 U.S.C. 371, and she now appeals.
II
The defraud clause of 18 U.S.C. 371 prohibits all conspiracies to
defraud the United States, or any agency thereof in any manner or for any purpose.
While this seems to cover only defrauding in the normal sense of the word acquiring another's property by intentional misrepresentations - the word defraud
has been read much more broadly. Defrauding the government under section 371
means obstructing the operation of any government agency by any deceit, craft or
trickery, or at least by means that are dishonest. Hammerschmidt v. United States,
265 U.S. 182, 188 (1924). The conspiracy need not aim to deprive the government
of property. Haas v. Henkel, 216 U.S. 462, 479 (1910). It need not involve any
detrimental reliance by the government. Dennis v. United States, 384 U.S. 855,
861-62 (1966). Neither the conspiracy's goal nor the means used to achieve it need
to be independently illegal. United States v. Tuohey, 867 F.2d 534, 537 (9th Cir.
1989). To convict someone under 18 U.S.C. 371 the government need only show
(1) he entered into an agreement (2) to obstruct a lawful function of the government
(3) by deceitful or dishonest means and (4) at least one overt act in furtherance of the
conspiracy. Hammerschmidt, 265 U.S. at 188* * * . This is a very broad provision,
which subjects a wide range of activity to potential criminal penalties.
Yet the government proposes an even broader reading of section 371, one that
eliminates element (3) altogether. It contends any conspiracy to obstruct a
government function is illegal, Gov't Brief at 15-16, even if the obstruction is not
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done deceitfully or dishonestly. Under this reading, the government argues, people
have a duty not to conduct their business affairs in such a manner that the IRS
would be impeded and impaired in its . . . collection of revenue. Gov't Brief at
16-17. Or, as government counsel candidly asserted at oral argument, if what you're
doing, legal or illegal, is intended to impede and impair the Internal Revenue
Service, . . . that constitutes a crime under section 371.
We think not. The Supreme Court has made it clear that defraud is limited
only to wrongs done by deceit, craft or trickery, or at least by means that are
dishonest. Hammerschmidt, 265 U.S. at 188. n2 Obstructing government functions
in other ways - for example, by violence, robbery or advocacy of illegal action - can't
constitute defrauding. Id.; see also United States v. Murphy, 809 F.2d 1427,
1431-32 (9th Cir. 1987) (not disclosing something that one has no independent duty
to disclose isn't conspiracy to defraud, even if it impedes the IRS).n3
--------------[Beginning of Footnote]---------------------n3 As the government points out, some recent cases do talk of section 371
punishing any conspiracy to obstruct a function of the government, without
mentioning the dishonest means requirement. See Dennis, 384 U.S. at 861 (dictum);
United States v. Johnson, 383 U.S. 169 (1966) (dictum); Tuohey, 867 F.2d at 537
(dictum). But we answer this argument the same way Hammerschmidt, 265 U.S. at
187, did when distinguishing Haas, 216 U.S. at 479, a case that also seemed to read
conspiracy to defraud as broadly as the government suggests: Because those cases
involved deceitful and dishonest conduct, they didn't have to decide whether section
371 reached conspiracies to obstruct the government in ways that were neither
deceitful nor dishonest. See Dennis, 384 U.S. at 858 (defendants lied to the
government); Johnson, 337 F.2d 180, 185-86 (4th Cir. 1964) (defendants bribed
government officials), aff'd as to that point, 383 U.S. 169 (1966); Tuohey, 867 F.2d
at 538 (defendants failed to make required disclosures).
Certainly the Supreme Court thinks Hammerschmidt is still good law: McNally v.
United States, 483 U.S. 350, 358-59 & n.8 (1987), cited (albeit in dictum)
Hammerschmidt's deceit, craft or trickery language as representing the correct
reading of section 371. Moreover, Dennis itself cited Hammerschmidt with no
indication it was being overruled. 384 U.S. at 861.
--------------[End of Footnote]---------------------And surely this is the sensible reading of section 371. Under the
government's theory, a husband who asks his wife to buy him a radar detector would
be a felon - punishable by up to five years in prison and a fine of $10,000 - because
their actions would obstruct the government function of catching speeders. So would
a person who witnesses a crime and suggests to another witness (with no hint of
threat) that they not tell the police anything unless specifically asked about it. So
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would the executives of a business that competes with a government-run enterprise

and lowers its prices to siphon off the government's customers. So would co-owners
of land who refuse to sell it for use as a military base, forcing the government to go
to the extra trouble of condemning it. So would have Elliot Richardson and William
Ruckelshaus, had they agreed with each other to quit if asked by President Nixon to
fire Archibald Cox. (Government counsel conceded at oral argument that her
reading of section 371 would outlaw the conduct described in the first two
hypotheticals.)
The federal government does lots of things, more and more every year, and
many things private parties do can get in the government's way. It can't be that each
such action is automatically a felony. The government may, if it wants to, explicitly
outlaw conduct it thinks unduly obstructs its functions; in fact, in 1987, it enacted a
regulation, 31 C.F.R. 103.37, prohibiting the very conduct at issue in this case. But
we're unwilling to conclude Congress meant to make it a federal crime to do
anything, even that which is otherwise permitted, with the goal of making the
government's job more difficult.
III
The instruction given to the jury reflected the government's spurious theory.
The district court told the jury it should find Caldwell guilty if she merely agreed
to defraud the United States by impeding, impairing, obstructing and
defeating the Internal Revenue Service in ascertaining, computing,
assessing and collecting taxes . . . .
The law relating to [this] element[] is as follows:
You must find beyond a reasonable doubt that there was a joint plan
to obstruct, impede, impair and defeat [the IRS] . . . .
6 RT 1156-57. The district court didn't tell the jurors they had to find Caldwell
agreed to do this by deceitful or dishonest means.
Failing to instruct jurors about an essential element of a crime is
constitutional error because it lets them convict without finding the defendant guilty
of that element. Cabana v. Bullock, 474 U.S. 376, 384 (1986). Maybe the jury did
think Caldwell meant to obstruct the government in a deceitful or dishonest way,
perhaps by failing to file required reports, or by making false statements to the
government. But it's also possible the jury took the same view the government urged
us to take, and found Caldwell guilty just because she agreed to help obstruct the
IRS, even if she didn't agree to do so deceitfully or dishonestly. And because the
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Sixth Amendment requires that all elements of the crime be found by the jury - not
just by appellate judges reviewing the record - we can't say the error was harmless.
IV
Making it easy for people to cheat on their taxes hardly deserves a good
conduct medal. And Caldwell might indeed have conspired to obstruct the
government by deceitful or dishonest means; the government may still try to prove
this by retrying her before a properly instructed jury. But what the government
actually did prove - that Caldwell conspired to make the IRS's job harder - just isn't
illegal.
There are places where, until recently, everything which [was] not permitted
[was] forbidden . . . . Whatever [was] permitted [was] mandatory . . . . Citizens were
shackled in their actions by the universal passion for banning things. Yeltsin
Addresses RSFSR Congress of People's Deputies, BBC Summary of World
Broadcasts, Apr. 1, 1991, available in LEXIS, Nexis Library, OMNI file.
Fortunately, the United States is not such a place, and we plan to keep it that way.
If the government wants to forbid certain conduct, it may forbid it. If it wants to
mandate it, it may mandate it. But we won't lightly infer that in enacting 18 U.S.C.
371 Congress meant to forbid all things that obstruct the government, or require
citizens to do all those things that could make the government's job easier. So long
as they don't act dishonestly or deceitfully, and so long as they don't violate some
specific law, people living in our society are still free to conduct their affairs any
which way they please.
REVERSED
I think the student will get the starting point for analyzing the scope of the defraud
conspiracy from Judge Kozinkis analysis in Caldwell. I do provide in the footnote a reference for
future consideration.382
Hammerschmidt establishes the proper standard for a defraud conspiracy. What is the
relationship, if any, of that standard to the tax willfulness concept. You will recall that willfulness,
as used in the tax statutes, requires intentional violation of a known legal duty an intent to violate
a known law. Is the Hammerschmidt standard a willfulness standard or something different and,
perhaps from a proof perspective, lesser? Consider this from the CTM:
Moreover, the government is not required to show that the fraud was a crime on
its own. United States v. Jerkins, 871 F.2d 598, 603 (6th Cir. 1989). This means the
prosecutor is not burdened with having to establish all of the elements of an
underlying offense (e.g., tax evasion) and each member's intent to commit that
382
I have addressed this theme ad nauseum in John A. Townsend, Is Making the IRS's
Job Harder Enough?, 9 Hous. & Bus. Tax L.J. 260 (2009) and a related online appendix.
- 194 -
offense (e.g., willfulness). Rather, all the prosecutor must show is that the members
agreed to interfere with or obstruct one of the government's lawful functions by
deceit, craft or trickery, or at least by means that are dishonest. Hammerschmidt v.
United States, 265 U.S. 182, 188 (1924); see United States v. Hurley, 957 F.2d 1, 4-5
(1st Cir. 1992); United States v. Jerkins, 871 F.2d 598, 603 (6th Cir. 1989); United
States v. Nersesian, 824 F.2d 1294, 1313 (2d Cir. 1987); accord United States v.
Caldwell, 989 F.2d 1056, 1058-59 (9th Cir. 1993) (see discussion at 23.07[2][c],
infra ). Cf. United States v. Alston, 77 F.3d 713, 720-21 (3d Cir. 1996) (holding that
where indictment for conspiracy to defraud was narrowly drawn to rest solely on
alleged facts of structuring and where government's proof at trial was limited to
structuring, government was required to establish willfulness; but recognizing that
a true Klein conspiracy under the 'defraud' clause does not generally require proof
of knowledge of illegality.)
I would posit to readers that, although the words willfully or similar words textually commanding
knowledge of illegality is not part of the statute, the defraud conspiracy requirements are kissing
cousins to willfulness in the tax sense. I ask the reader to go back to the examples I used to address
this type of issue in the 7212(a), tax obstruction context. The examples begin on p. 132. I think
the same issues are present with respect to the Klein / defraud conspiracy which, after all, is an
obstruction crime in a tax context.
(3)
Final Thoughts on the Defraud Conspiracy.
I have provided only a brief introduction to the defraud conspiracy. I again direct the student
with a thirst for more to Professor Goldsteins article. I quote a brief excerpt:
In combination, conspiracy and defraud have assumed such broad and
imprecise proportions as to trench not only on the act requirement [the requirement
that crimes in our jurisprudence require evil acts and not just evil intent] but also on
the standards of fair trial and on constitutional prohibitions against vagueness and
double jeopardy. 383
Without a change in the statute, Professor Goldstein urges:
The only guidelines which are likely to stand the test of time and serve the needs
both of the man of common intelligence and of the trial process are those to be
found in the ordinary or legal meaning which the phrase enjoyed until Tyner
began the movement toward equitable fraud. That ordinary meaning would
endow defrauding with two minimal characteristics: first, there must be a
falsehood, a lie; second, the lie must be purposive in nature. Thus, a bribe which
accompanied a submission of information in itself accurate, and which was designed
to ensure favorable governmental action, would not constitute fraudulent conduct.
383
Goldstein, p. 409.
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Though the total fact situation would indicate purposiveness, the first element
the lie would not be present.384
Finally, in this regard, I ask that you consider whether the doctrine of lenity and variant concepts
of similar impact (such as fair notice) in interpreting penal statutes can assist in limiting the
Governments extravagant claims as to the scope of the defraud conspiracy.385
g.
Government Option - Offense or Defraud Conspiracy or

Both?
(1)
Conceptualizing the Issue - Its All About Scope.
If you have followed this discussion so far you know that where the offense conspiracy can
be charged for a tax crime (e.g., 7201), there will likely be taxes that are fraudulently underpaid,
and hence, provided some element of deceit, the conduct can equally support a defraud conspiracy
because an attempt to violate the statute is an attempt to defraud the Government even in the less
expansive definition of the term.386 Does that mean that the Government can charge either or, worse,
both? The answer appears that the Government can, but there is some considerable conceptual
confusion as to precisely how the Government can charge it (i.e., in a single count or in two counts).
Heres my relatively summary analysis of the issue, and it all relates to scope. If the agreement that
the parties reach includes both conduct constituting specific offenses and conduct that, while not
specific offenses, would qualify as object of a defraud conspiracy, there is one conspiracy, and the
Government can proceed to charge either an offense conspiracy or a defraud conspiracy or both in
a single count and there would be a single crime. If, however, there are two separate agreements
i.e., there are two separate conspiracies one agreement to commit one or more specific offenses
and one agreement to do things that are an object of a defraud conspiracy, the two agreements
should be pled in separate counts.387 The difference is critical, because the single agreement, one
384
Goldstein, supra, pp. 455-6.

I discuss these concepts in my article John A. Townsend, Is Making the IRS's Job
Harder Enough?, 9 Hous. & Bus. Tax L.J. 260 (2009).
386
See United States v. Rosenblatt, 554 F.2d 36, 40 (2d Cir. 1977) (These two clauses
of the statute overlap when the object of a conspiracy is a fraud on the United States that also
violates a specific federal statute. See Goldstein, Conspiracy to Defraud the United States, 68 Yale
L.J. 405, 436-40 (1959).
387
I was previously Stein where Count One, a single count of conspiracy, charges both
the offense and defraud conspiracy. However, a single count charging both conspiracies can be
confusing to a jury. See United States v. Gordon, 844 F.2d 1397, 1401-1402 (9th Cir. 1988)
(focusing on possibility of possibility that all jurors will believe the defendant guilty of some
conspiracy, but less than unanimous as to each).
In CTM Instruction 18.371-1 (2008 ed.), the CTM says:
The Tax Division advises against charging a conspiracy to defraud and a conspiracy
to commit substantive tax offenses in the same count or indictment. This is rarely
necessary and tends to unduly complicate the trial, especially with respect to the jury
385
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count conspiracy charge puts the conspirators at risk for a only single 5 year sentence. Where as the
two separate conspiracy agreements put the conspirators at risk for a stacked 10 year sentence. The
key issue to focus on for avoiding conceptual confusion is to establish the scope of what the parties
agreed to do.
These scope issues may be illustrated quite nicely in the context of tax shelters.388 Assume
that 10 persons agree to market a tax shelter. Five of the 10 are the design team, principally lawyers,
who package the best possible position into a tax opinion that they say is more-likely-than-not to
prevail. The other five are the sales team, responsible for locating potential investors, selling the
product with the tax opinion, assisting the investors in implementation, and reporting the tax results
on the return. The design team creates a complex shelter, with a 100+ page supporting tax opinion
that concludes that the claimed tax result will more likely-than-not prevail; the design team
believes, however, that the more-likely-than-not assessment is not true and that, in truth, the tax
results are unlikely to prevail if audited. The tax opinion is therefore false as to the nature of their
opinion, and the design teams participation is willful as to the tax result touted. The Government
therefore can convict the design team for both the substantive offense and the offense conspiracy.
The sales team, however, is not aware that the opinion is not truthful; taking the bare opinion at face,
the design team is only aware that the opinion is just barely more-likely-than not say just 50.1%
(so, lets call it an aggressive more-likely-than not opinion, with aggressivity determined by
proximity to 50%, but anything in excess of 50% works, even though it is difficult to discern a
difference between 49.9% and 50.1%). Although, on this basis, the sales team thinks the tax shelter
works and has no intention to peddle phony tax shelters to their clients, the sales team members
agree among themselves to offer audit avoidance techniques involving no dishonesty.389 The
techniques seek simply to arbitrage perceived IRS audit deficiencies. For example, the sales team
instructions.
In United States v. Helmsley, 941 F.2d 71, 90 (2d Cir. 1991), cert denied, 502 U.S. 1091 (1991), the
court sustained a single count for both conspiracies because the jury charge eliminated the
possibility of confusion.
388
The immediate context of this example is the Stein case which was KPMG tax shelter
criminal prosecution in the Southern District of New York. The defendants served different roles
which included two functions designing the shelter and marketing the shelter. That functional
division is a common way of doing business. The example in the text presents one possible way
of looking at the facts alleged in Stein.
389
This is a critical assumption of a fact that, I think, exists in Stein. Professor Buell
explains the Stein superseding indictment as based upon the Governments assertion that the
defendants has a consciousness of wrongdoing which seems to be a core requirement of the
criminal law as I discuss later. Samuel L. Buell, Novel Criminal Fraud, 81 N.Y.U.L. Rev. 1971,
2003 (2006). In support of that claim,. Professor Buell cites an exchange in which the KPMG sales
team was cautioned not to leave copies of the presentation documents with the prospective clients
because those documents would reveal the true purpose of the transaction thus invalidating the
shelter. Whether or not that characterization of the particular document in question is accurate on
its face or in context, as characterized by Buell, the document evidences the writers belief and
perhaps, by inference, the recipients belief that the shelter would not work. That is not the
assumption I make in the example above.
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recommends that the investors consider using the perfectly legal grantor trust to implement the
shelter on the notion IRS audits fewer grantor trust returns than individual returns and are less likely,
on audit of individual returns to audit the flow-through from grantor trusts. Since the sales team has
no intention to participate in promoting shelters that do not work, the sales team should not be at risk
of being convicted of the underlying offense of tax evasion or the offense conspiracy to commit tax
evasion.390 Conceptually, there are two separate agreements in conspiracy theory in this example
(1) the design team agreement that includes participation willfully in the violation of the tax law
and (2) the sales team agreement that does not include participation willfully in the violation of the
tax law. At least in crisp conspiracy theory, the sales team would not be guilty of the substantive
offense or the offense conspiracy under Pinkerton. The question presented is whether the sales team
would be subject to the defraud conspiracy because they did agree among themselves to take audit
avoidance action.391
390
I assume that the risk that the conspiracy the sales team entered did not include a
reasonable risk that the design team would falsely represent to the sales team the quality of the
opinion that they asked the sales team to market. Of course, under the facts posited in the text, that
is what happened, but the facts do not posit that the sales team could have reasonably foreseen that
the design team would lie about the quality of the opinion.
391
There are variations of this example that would highlight some key conspiracy
concepts related to the issues presented in this article and in Stein. For example, what if the key to
the shelter was the investors affirmative factual representation that he or she has a profit motive for
entering the transaction. In truth, that representation is not crisply a pure factual representation, but
contains an inherent legal ambiguity as to what precisely is meant by profit, an ambiguity that is
exploited by many shelters that have some component of investment and potential profit that has
varying degrees of tangentiality to the income needing shelter; indeed, to the extent that profit
motive is ambiguous, the requirement of its presence may create a knowability issue and thus may
not be a basis for prosecution under James and its progeny. But assume here that the presence of
profit motive is a knowable standard, and that the sales team received the representation from the
investors knowing that it was false in at least some of the cases (e.g., the investors winked, smirked
and crossed their fingers when they made the representation). Then, of course, the sales teams
agreement would include a goal to commit a specific offense (tax evasion); the agreement, properly
characterized, would be an offense conspiracy. The step to decrease audit visibility rather than
being the object of a potential defraud conspiracy, would be a means or step in an offense
conspiracy. The Government unquestionably must prove willfulness for the properly pled offense
conspiracy. This blending of the characteristics of the offense and defraud conspiracies will be
discussed later, but I am sure you can see that if, as imagined by the Government, the defraud
conspiracy is easier to prove than the offense conspiracy, it will charge the defraud or both defraud
and offense, as it did in Stein, with defraud as the fall back if it cant prove the offense conspiracy.
I should also note a nuance that, if the conspiracies alleged are really two different conspiracies, they
should be alleged in a separate count because they offer at least the risk of a non-unanimous verdict.
See United States v. Gordon, 844 F.2d 1397, 1401-2 (9th Cir. 1988).
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(2)
Overlap.
A problem arises where there is a single conspiratorial agreement that encompasses both
offense violation conduct and conduct that meets the definition of the defraud conspiracy. In this
example, there is a single agreement. The question then is whether the Government can charge
either of the conspiracies or both of them at its whim. Keep in mind that, since it is a single
agreement, it will be charged in a single count. But, the Government might get some flexibility by
asserting the defraud conspiracy in addition to or in lieu of the offense conspiracy. One benefit to
charging the defraud conspiracy alone would be to avoid having to prove willfulness if the object
crime of an offense conspiracy charge would require proof of willfulness which the Government
may not be able to do. And, along the same lines, the Government whose case is really about an
offense conspiracy may want to also charge the defraud conspiracy just in case the jury is unwilling
to buy the offense conspiracy claim.
In United States v. Minarik, 875 F.2d 1186 (6th Cir. 1989), the Sixth Circuit held, in what
it later described as dicta, that where the facts alleged made out an offense conspiracy, the
Government could not charge a defraud conspiracy. The difference is important, for as noted above,
the intent requirement for the defraud conspiracy is a significantly lower bar than for the offense
conspiracy. Since Minarik, the Sixth Circuit has chipped away at the holding without disavowing
it altogether and no other court has embraced it. In one of its more recent chips at the holding, the
Sixth Circuit said:
Dicta in Minarik implies that the two clauses within 371 are nevertheless
mutually exclusive: the Government's handling of this case, graphically illustrates
the confusion generated if the offense clause and the defraud clause are treated as
overlapping rather than mutually exclusive. Id. at 1194. Since Minarik, however,
this court has limited the expansive language intimating that the offense and defraud
clauses are mutually exclusive: Minarik did not require that all prosecutors charge
all conspiracies to violate a specific statute under the offense clause of section 371.
****
Because the Minarik requirement of mutual exclusivity is dicta, and because we have
subsequently confined Minarik to its facts, we conclude that the law in this circuit
does not require, in circumstances such as these, that the conspiracy be charged
only under the offense clause of 371.392
Consider also the following case:
392
United States v. Kahlife, 106 F.3d 1300, 1304, 1306 (6th Cir. 1997) (quotation marks
and citations omitted for readability).
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United States v. Alston

77 F.3d 713 (3d Cir. 1996)
[Background: The defendant, a small scale importer of foreign automobiles, structured cash
purchases of bank money orders to purchase the automobiles in amounts so that no single purchase
of money orders exceeded the $10,000 amount that required banks to report the transaction on
currency transaction report forms. I discuss those reporting provisions below, but they are similar
to the requirement we studied earlier for businesses to report cash transactions ( 6050I). The
defendant was charged with two crimes: (i) a defraud conspiracy on the ground that the structuring
resulted in the reports not being made, thus impeding the lawful function of the IRS (this is, as the
court noted, a classic Klein conspiracy); and (ii) the substantive offense of structuring (piecemealing bank transactions to fit under the $10,000 threshold, which I cover later in this text). Of
course, as we studied above, the conspiracy and the substantive offense are separate crimes for
which separate convictions can be had. The defendant was convicted of both charges in a non-jury
trial. The defendant later filed a motion at the trial court level to set aside the convictions based on
an intervening Supreme Court case, United States v. Ratzlaf, 510 U.S. 134 (1994) which had held
that the state of mind for the substantive offense of structuring required willfulness which required
that the defendant have known that not only would the structuring result in failure to file the form
but that structuring itself was a substantive offense. In response to the motion, the Government
admitted that it could not sustain the burden of proving beyond a reasonable doubt that the defendant
knew that structuring was a crime. The trial court then dismissed the substantive offense, but
sustained the conviction for the defraud conspiracy. On appeal, the issue was whether the defraud
conspiracy could be sustained. Note that the defendant in the case clearly knew about the reporting
requirement and intended to avoid it and thereby hide information for the IRS, which under the
formulations in the preceding discussion if viewed liberally might support a defraud conspiracy
charge. Some citations and footnotes are omitted from the following materials from the case.]
Section 371 refers to two types of conspiracies: (1) conspiracy to commit a
substantive offense proscribed by another statute (the offense clause); and (2)
conspiracy to defraud the United States (the defraud clause). While the offense
clause requires reference to another part of the criminal code, the defraud clause
does not, simply because the substantive offense (fraud) is contained in the statute
itself.
It is well settled that to convict a defendant of conspiracy under the offense
clause, the government must prove whatever level of mens rea is required for
conviction of the underlying substantive offense. The Supreme Court has made clear
that in order to sustain a judgment of conviction on a charge of conspiracy to violate
a federal statute [under the offense clause of 371], the Government must prove
at least the degree of criminal intent necessary for the substantive offense itself.
United States v. Feola, 420 U.S. 671, 685-86 (1975) (citing Anderson v. United
States, 417 U.S. 211, 226 (1974)).
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[Referring to an earlier precedent where it had vacated both the defraud conspiracy count and the
substantive count for violation of the Federal Election Campaign Act which had the same willfulness
requirement, the Court reasoned that this defraud conspiracy conviction could not be sustained in
view of the Governments concession that it could not prove knowledge of criminality of structuring
to avoid the reporting requirement. Although it dealt with the defraud conspiracy, the Court seems
to have been troubled by the nexus between the substantive offense and the conspiracy. Thus, the
court reviewed the indictment to see that the essence of the defraud conspiracy allegations were
structuring, the substantive offense.]
The indictment, in charging conspiracy to defraud, asserts only that Alston
impaired the United States and Treasury in its lawful governmental function of
collecting data and reports of currency transactions in excess of $10,000, language
that sounds in structuring. Indeed, the entire indictment speaks only to structuring
activities and contains no allegations that Alston defrauded the government in any
other respect. Because the indictment is narrowly drawn to rest solely on the alleged
facts of structuring, and because it is conceded that Alston lacked the requisite
mental state to be guilty of structuring, Alston's conviction on unspecified broader
grounds cannot be sustained.
Moreover, the government has conceded that its theory against Alston for
fraud against the United States is nothing more than structuring. See Gov't Supp.
Mem, June 30, 1995 at 2 (The basis for our definition of the underlying legal
obligation/legal prohibition to make out a case of an agreement to defraud the
government is found at 31 U.S.C. 5324(a)(3).). As a consequence, the
government offered the same body of evidence at trial to support both the charge
against Alston for conspiracy to defraud and the charge against him for
conspiracy to structure. The government neither charged, nor attempted to prove
at trial, that Alston engaged in any fraudulent activity separate from, or in addition
to, what can only be characterized as structuring.
Despite this concession and the proof at trial, and even though the only
charges found in the indictment describe the act of structuring, the government
argues that Alston's conspiracy to defraud conviction did not require proof of the
willfulness required for a structuring conviction. The government contends
instead that Alston was guilty of participating in a so-called Klein conspiracy to
defraud the United States by obstructing or impeding the IRS in its functions and
duties under the Bank Secrecy Act to collect analyze, and disseminate information
contained in CTR reports. (Appellee's Brief at 11). Because establishing a true
Klein conspiracy under the defraud clause does not generally require proof of
knowledge of illegality, the government contends that its proof that Alston knew of
the bank's CTR filing requirements is a sufficient showing of mens rea to sustain his
conviction for conspiracy to defraud.
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We cannot discern any difference between the government's defraud

scenario and the structuring scenario of which Alston was acquitted. Both
conspiracies involve structuring prior to the 1994 amendment to 5324. Therefore,
given the indictment and the proofs at trial, we conclude that to obtain a conviction
under either the defraud or offense clause of 371, the government had to prove
that Alston knew that his structuring activities were illegal. See Ratzlaf, supra.
Although we do not foreclose the possibility of convicting a defendant under 371's
defraud clause based on charges in addition to or different from pre-1994 acts of
structuring, as we have just discussed, the present indictment, under paragraph 7(a),
charged no more or less than a straight-out structuring conspiracy.
Notably, the cases that have upheld convictions for conspiracy to defraud
under 371 have all involved additional charges in the indictment and additional
evidence produced at trial, over and beyond that required for a conviction for
pre-1994 structuring. For instance, in United States v. Jackson, 33 F.3d 866 (7th Cir.
1994), cert. denied, 115 S. Ct. 1316 (1995), the Seventh Circuit affirmed the
defendants' convictions for conspiracy to defraud under 371 despite reversing their
anti-structuring convictions.
In Jackson, however, the indictment, in charging the 371 defraud count,
never mentions a structuring violation or the relevant anti-structuring statutes. Id.
at 870. Furthermore, Jackson involved extensive other evidence beyond structuring
activity demonstrating a conspiracy to defraud the United States, id. at 868, including
record evidence that the defendants had no wage or other income, id. at 869, and yet
had spent over $300,000 to purchase homes and exotic automobiles. Id. at 869.
Because, in the present case, the charge against Alston for conspiracy to
defraud was nothing more than a charge of conspiracy to structure, we will reverse
Alston's conviction where his conviction was not based on proof that he had
willfully structured, as required under Ratzlaf. Where either Congress or the
Supreme Court has spoken on the required level of mens rea required to obtain a
conviction for structuring, the government may not subvert that mandate by juggling
the defraud and offense clauses of 371 so as to substitute one for the other.
If the offense clause of 371 specifically covers an act or offense and the
indictment charges only that act or offense as having been committed, and the proofs
at trial reveal no more than such acts of offense, a defendant not guilty under the
"offense" clause cannot alternatively be convicted under the broad "defraud" clause
of 371.
Assuming the Government can choose which conspiracy to charge, it will of course have an
incentive to choose the one which imposes lesser burdens on the facts at hand. The Minarik and
Alston courts were not the first to express alarm at this and, as noted above, the relaxed burdens for
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the defraud conspiracy are troubling indeed. Thus, long ago, the Second Circuit expressed its
concern as follows:
When the government proceeds under the conspiracy-to-defraud clause, in
cases that could as easily have been brought under the offense clause, the courts
must be alert to subtle attempts to broaden the already pervasive and wide-sweeping
nets of conspiracy prosecutions. Grunewald v. United States, 353 U.S. 391. The
terms conspiracy and defraud, when used together, have a peculiar
susceptibility to a kind of tactical manipulation which shields from view very real
infringements on basic values of our criminal law. Goldstein 409.393 Accordingly,
conspiracy-to-defraud prosecutions are scrutinized carefully. Dennis v. United
States, 384 U.S. 855, 860 (1966).394
(3)
Charging Offense and Defraud Separately.
I assumed above that the Government would make its charging decision as to whether to
assert either or both offense and defraud in a single indictment. I want now to focus on what will
or should happen if the Government charges one (say offense conspiracy) in one indictment and,
after the conclusion of that case with either a guilty or not guilty verdict, charges the other (say
defraud conspiracy) in a separate indictment. Analytically, the issue is one of scope of the
conspiracy. If the conspiracy is a broad conspiracy to commit offenses and to defraud the United
States, the issue is resolved easily. The statute criminalizes a single conspiracy only once, and the
first verdict should preclude the later charge.
This answer is a bit facile, but I think gets to the right result. The analytical framework is
more complex. For purposes of this text, I think, chasing down the complexity would be more
distractive than helpful, so I refer the reader in the footnote to further discussions.395
393
[Text Note: The reference here is to the Goldstein article cited earlier in the text.]
United States v. Rosenblatt, 554 F.2d 36, 40 (2d Cir. 1977).
395
The most recent significant decision is United States v. Rigas, 605 F.3d 194 (3d Cir.
2010) (en banc). Readers in the Fifth Circuit might want to take a look at United States v. Rabhan,
628 F.3d 200 (5th Cir. 2010), a nontax case, where the Court nicely lays down the considerations
as to the interface of the Double Jeopardy Clause and the scope of the conspiracy concept. Rabhan
does not involve tax or even the single conspiracy with offense objects and impair or impede objects.
But the concept is the same is the conspiracy alleged in the second charge within the scope of the
the conspiracy alleged in the prior charge. Notable in the discussion in Rabhan is the following
quote from Braverman v. United States, 317 U.S. 49, 53 (1942):
When a single agreement to commit one or more substantive crimes is evidenced by
an overt act as the statute requires, the precise nature and extent of the conspiracy
must be determined by reference to the agreement which embraces and defines its
objects. Whether the object of a single agreement is to commit one or many crimes,
it is in either case that agreement which constitutes the conspiracy which the statute
punishes. The one agreement cannot be taken to be several agreements and hence
several conspiracies because it envisages the violation of several statutes rather than
394
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I discuss one other issue that relates to how the Government charges. Assume that (i) the
indictment charges an offense conspiracy for some specific offense of cheating the Government
(lets say a charge of tax evasion with multiple defendants acting in concert), (ii) a defraud
conspiracy is not charged, (iii) the jury convicts, and (iv) on appeal, the offense conspiracy is found
wanting. Can the court of appeals affirm on the basis that, although not explicitly charged, the
offense conspiracy charged necessarily includes a defraud conspiracy (assuming that the evidence
is sufficient to support a defraud conspiracy had it been charged)? I would have thought the easy
answer is no. But in an older case, the Eleventh Circuit suggested that the conviction could be
affirmed.396 I understand what the Court said but I am skeptical. Nevertheless, it may not be a real
issue because, at least in the tax cases of which I am aware, the indictment will charge both an
offense conspiracy and a defraud conspiracy.
h.
Overt Act.
(1)
General Conspiracy Statute.
The overt act requirement is contained in the general conspiracy statute (18 U.S.C. 371).
Common law did not require allegation or proof of an overt act in furtherance of the conspiracy.397
Although some narrowly targeted federal conspiracy statutes do not include the requirement of an
overt act, the general conspiracy statute including the Klein conspiracy does have the
requirement.398 The overt act requirement is designed to show that the conspiracy is at work and not
one.
The same analysis applies if the object is an offense and to impair or impede the functioning of an
agency.
396
United States v. Elkins, 885 F.2d 775 (11th Cir. 1989), cert. den. 494 U.S. 1005
(1990). In Elkins, a nontax case, the defendants were charged with conspiring to commit wire fraud
against the United States, 18 U.S.C. 1343. Based on an intervening Supreme Court case, McNally
v. United States, 483 U.S. 350 (1987), the Eleventh Circuit found that specific offense conspiracy
charged to have been improper. Nevertheless, the Court held that, since the specific offense
conspiracy charged necessarily included a claim that the defendants had defrauded the Government,
the conviction could be sustained as a defraud conspiracy even though a defraud conspiracy had not
been charged. The Court did acknowledge that it could not sustain a conviction on a theory not
charged in the indictment and submitted to the jury but found, in effect, that the defraud conspiracy
charge was implicit in the specific offense charged. The Court found comfort in the fact that the
judges instructions to the jury could be read broadly enough to cover a defraud conspiracy, although
that apparently was not what the trial judge intended since the only offense charged in the indictment
was an offense conspiracy.
397
United States v. Shabani, 513 U.S. 10, 13-14 (1994); Fiswick v. United States, 329
U.S. 211, 216 n.4 (1946).
398
See United States v. Shabani, 513 U.S., at 14.
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solely in the minds of the conspirators.399 The overt act need not be an act which is criminal, but just
an affirmative overt act even an otherwise innocent act in furtherance of the conspiracy.400
What does it mean to say that an overt act is required for conviction of a general conspiracy
(including a Klein conspiracy)? Certainly, the indictment must plead the element and the jury must
find the existence of the element in order to convict. But, many indictments merely plead generally
the existence of at least one overt act in furtherance of the conspiracy, without specifying the overt
act; the jury then finds in a general guilty verdict that at least one unspecified overt act occurred.
Must the indictment be more specific as to the precise overt act or acts alleged to support
conviction? Must the jury specifically find and reach unanimity as to one or more overt acts that
support the general verdict of conviction? The sparse authority addressing the issue directly seems
to support the proposition that the jury need not be unanimous as to any overt act.401 Thus,
conceivably, each of the 12 members of the jury could find a separate overt act to support
conviction. Does that strike you as odd? But what is the alternative special interrogatories to the
jury to find the specific overt act to which they agree?
Finally, although the underlying tax crime may require materiality (e.g., it is generally
thought that the amount for tax evasion must be substantial, in this context a materiality requirement,
a la Spies), the overt act in a conspiracy to commit the underlying tax crime need not be material.402
On the other hand, I would suspect that juries will apply some materiality requirement. For
example, assume two guys are drinking heavily, in the course of a session mostly about girls, and
hatch a scheme to rob a bank so that they will have more money to chase and catch girls. They
throw out all sorts of wild ideas about which banks and how to do it. One of them writes the ideas
399
Yates v. United States, 354 U.S. 298, 334 (1957).

Iannelli v. United States, 420 U.S. 770, 785 n.17 (1975) (Indeed, the act can be
innocent in nature, provided it furthers the purpose of the conspiracy, citing Yates v. United States,
supra, pp. 333-334, and Braverman v. United States, 317 U.S. 49 (1942)); see also Castro v. United
States, 296 F.2d 540, 542-43 (5th Cir. 1961) (The overt act . . . need not be a crime and is not a part
of the offense charged, but simply something done in furtherance of the object of the conspiracy .
. . .);
401
See United States v. Sanderson, 966 F.2d 184, 187 (6th Cir. 1992); United States v.
Sutherland, 656 F.2d 1181, 1202, (5th Cir. 1981) (no specific unanimity instruction as to overt acts
required); and United States v. Stone, 323 F. Supp. 2d 886 (E.D. Tenn. 2004). Indeed, for example,
if the indictment alleges and there is proof of two overt acts and the jury convicts in a general
verdict, the general verdict will stand even if the proof as to one of the two overt acts is found
insufficient on appeal. Griffin v. United States, 502 U.S. 46 (1991) (limiting the prior holding in
Yates v. United States, 354 U.S. 298 (1957) which held that if the statute on one of the two overt
acts had expired, a general verdict of guilty must be reversed because it cannot be determined where
the jury relied upon the statutorily barred overt act). The presumption, I guess, is that, except in
cases of legal insufficiency, the jury acted properly. See United States v. Mann, 161 F.3d 840, 857
(5th Cir. 1999), reh. den. 168 F.3d 488 (5th Cir. 1999), cert den. 526 U.S. 1117 (1999).
402
United States v. Mann, 161 F.3d 840, 858 n. 36 (5th Cir. 1999), reh. den. 168 F.3d
488 (5th Cir. 1999), cert den. 526 U.S. 1117 (1999)
400
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down so that they wont forget them later and can use them to implement the scheme. The next day,
while sober, they realize the plan is foolish but the paper is kept and later discovered by law
enforcement. Is the writing an overt act intended to further the conspiracy? I suspect that a
prosecutor would not prosecute and a jury would not convict.
So, what are the overt acts required for a tax conspiracy? In Klein, the overt acts were
various acts to disguise the nature and existence of income. The CTM has a number of examples
from each circuit of Klein conspiracies and for flavor I catalog the ones from the Fifth Circuit:403
1. Creation of false tax deductions by backdating documents relating to a real
estate tax shelter investment.404
2. Money laundering scheme using money exchange business to exchange
U.S. currency into pesos without CTRs being filed.405
3. Corporation paying personal expenses of owner as well as construction
costs for new church and school, all of which were written off as business deductions
or charitable donations, alteration of invoices.406
4. Money laundering scheme using front companies and foreign bank
accounts which disguised drug proceeds as loan repayments.407
5. Drug trafficker under IRS criminal investigation concocts story with
codefendant to justify his increases in net worth and corroborate his lack of
ownership of certain property and assets.408
(2)
Special Conspiracy Statutes.
You should take care in reviewing other conspiracy-like statutes because they may not
require an overt act. For example, the money laundering statute ( 1956(h)) has the following
conspiracy provision:
403
404
405
CTM 23.07[2][b] (2008 ed.).

Citing United States v. Bourgeois, 950 F.2d 980 (5th Cir. 1992).
Citing United States v. Breque, 964 F.2d 381 (5th Cir. 1992), cert. denied, 113 S. Ct.
1253 (1993).
406
Citing United States v. Chesson, 933 F.2d 298 (5th Cir.), cert. denied, 112 S. Ct. 583
407
Citing United States v. Montalvo, 820 F.2d 686 (5th Cir. 1987). We read Montalvo
408
Citing United States v. Lamp, 779 F.2d 1088 (5th Cir.), cert. denied, 476 U.S. 1144
(1991).
below.
(1986).
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(h) Any person who conspires to commit any offense defined in this section
or section 1957 shall be subject to the same penalties as those prescribed for the
offense the commission of which was the object of the conspiracy.
An overt act is not required for this conspiracy.409 However, an overt act is still be required to
establish the statute of limitations 410 and venue.411
Even with those statutes that do not require proof of an overt act, such proof may
substantially assist the prosecution in obtaining a conviction of conspiracy.412 From a practical
perspective, it may be difficult to prove the mental act of consent without some affirmative act that
shows the consent.
i.
Objectives, Concealment and Statute of Limitations.
For purposes of applying the statute of limitations, the Supreme Court has said that there are
two types of concealment. First, there is concealment designed to achieve the main objective of the
conspiracy. Second, there is concealment after the main objectives have been achieved.413 The
distinction, when viable, is crucial, because the former refreshes the statute of limitations, whereas
the latter does not. Some courts have reasoned that some crimes including some tax crimes
effected through conspiracies necessitate concealment; thus overt acts in furtherance of concealment
are in furtherance of the underlying crime and the main objectives of the conspiracy.414
409
Whitfield v United States, 543 U.S. 209 (2005).

See United States v. Laspina, while, in a footnote, declining to resolve the issue of
whether the crime required an overt act, held in the text that an overt act within the statute of
limitations period.
411
Whitfield v United States, 543 U.S. 209, 218 (2005).
412
Culp v. United States, 131 F.2d 93, 100 (8th Cir. 1942); Feigenbutz v. United States,
65 F.2d 122, 124 (8th Cir. 1933)); and Blumenthal v. United States, 158 F.2d 883, 888 (9th Cir.
1946).
413
Grunewald v. United States, 353 U.S. 391, 401-402, 405 (1957)
* * * after the central criminal purposes of a conspiracy have been attained, a
subsidiary conspiracy to conceal may not be implied from circumstantial evidence
showing merely that the conspiracy was kept a secret and that the conspirators took
care to cover up their crime in order to escape detection and punishment.
[There is] a vital distinction * * * between acts of concealment done in furtherance
of the main criminal objectives of the conspiracy, and acts of concealment done after
these central objectives have been attained.
414
See United States v. Mann, 161 F.3d 840, 859 (5th Cir. 1999), reh. den. 168 F.3d 488
(5th Cir. 1999), cert den. 526 U.S. 1117 (1999) (footnotes omitted):
Concealment is sometimes a necessary part of a conspiracy, so that statements made
solely to aid the concealment are in fact made during and in furtherance of the
charged conspiracy. In Forman v. United States, [361 U.S. 416 (1960)] the Court
held that an indictment alleged and the evidence supported a conspiracy to evade
410
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j.
Single or Multiple Conspiracies; Multiple Objectives.
In complex fact patterns, depending upon ones viewpoint (and predilections), there can be
a single overarching conspiracy or many different and separate conspiracies. A single conspiracy
can have multiple objectives, as compared to separate conspiracies for the various objectives.415
The objective to impede the IRS in the Klein conspiracy need not be the only objective -it need only be an objective. Parties consipiring to commit a non-tax crime may and usually will
conspire to take actions to make sure that they are not discovered. For example, they may agree to
hide the proceeds of their crime so that their crime is not discovered. But, they may intend also by
hiding the proceeds not only to avoid discovery of the crime but also to avoid the proceeds becoming
visible to the IRS so that it can assess and collect the tax. In such a case, the efforts to hide can
constitute a Klein conspiracy, even if the object to impede the IRS was not the principal objective
in hiding the proceeds.416
k.
Unindicted Co-Conspirators.
A defendant may be charged individually, with his co-conspirator(s) being named only as
unindicted co-conspirators. The CTM cautions prosecutors that in the absence of some sound
reason, it is not desirable to identify unindicted coconspirators in conspiracy indictments and that
the preferred language for dealing with unindicted co-conspirators is to allege that the defendant
conspired with another person or persons known to the grand jury and then to supply the names
of the others in a bill of particulars or in discovery.417 Why do you think the Government prefers
not to name the alleged co-conspirators in the indictment?418
l.
Withdrawal.
The defendant may be charged if he is a member of the conspiracy at the time the overt act
is taken or, if he had withdrawn by the time of the overt act, if that act, when taken, was reasonably
foreseen or foreseeable as a natural consequence of the conspiracy while he was a member.
Withdrawal has special meaning in the conspiracy context. Mere cessation of activity is not enough;
the withdrawal requires affirmative acts inconsistent with continued involvement and reasonable
taxes extending from 1942 to 1953, even though the last fraudulent return was for
1945, because concealment had to continue if the evasion was to succeed.
415
Braverman v. United States, 317 U.S. 49, 53 (1942); United States v.
Maldonado-Rivera, 922 F.2d 934, 963 (2d Cir. 1990), cert. denied, 111 S. Ct. 2811 (1991).
416
See United States v. Gricco, supra.
417
CTM 23.04[2][a] (2008 ed.) (citing USAM 9-11.130).
418
In the Enron criminal cases, the tally of unindicted co-conspirators reached over 114
and perhaps more. The names were apparently made available to defense counsel for those indicted
but were otherwise generally not made available except, in some cases, as required for pleadings that
were made public. See Mary Flood, The Fall of Enron: Judge: Half of 114 Can Be Public;
Complicated Ruling May Keep Other Names Secret, Houston Chronicle (12/11/04).
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communication of the withdrawal to the members of the conspiracy so that they cannot reasonably
rely upon his or her continued involvement.419
Withdrawal raises again the issue of the burden of proof in criminal cases. The Government
must prove all elements of the crime. Does the Government have to prove that the defendant had
not withdrawn from the conspiracy to be either guilty for an overt act committed by another or to
establish that the prosecution of the defendant is timely. The Supreme Court answered these issues
in a recent case that I quote because the quoted portions are relatively short and address the burden
of proof on affirmative defenses generally:
Smith v. United States
___ U.S. ___, 2013 U.S. LEXIS 601 (2013)
Upon joining a criminal conspiracy, a defendants membership in the ongoing
unlawful scheme continues until he withdraws. A defendant who withdraws outside
the relevant statute-of-limitations period has a complete defense to prosecution. We
consider whether, when the defendant produces some evidence supporting such a
defense, the Government must prove beyond a reasonable doubt that he did not
withdraw outside the statute-of-limitations period.
***
II.
Petitioners claim lies at the intersection of a withdrawal defense and a
statute-of-limitations defense. He asserts that once he presented evidence that he
ended his membership in the conspiracy prior to the statute-of-limitations period, it
became the Governments burden to prove that his individual participation in the
conspiracy persisted within the applicable five-year window. This position draws
support neither from the Constitution (as discussed in this Part II), nor from the
conspiracy and limitations statutes at issue (as discussed in Part III, infra).
Establishing individual withdrawal was a burden that rested firmly on the defendant
regardless of when the purported withdrawal took place.
Allocating to a defendant the burden of proving withdrawal does not violate
the Due Process Clause. While the Government must prove beyond a reasonable
doubt every fact necessary to constitute the crime with which [the defendant] is
419
United States v. U.S. Gypsum Co., 438 U.S. 422, 464-465 (1978); see also United
States v. Vallone, 698 F.3d 416, 512 (7th Cir. 2012) (addressing the issue in the context of a statute
of limitations argument that one of the defendants had allegedly ceased activity with respect to a
large and ongoing promotion of a fraudulent tax scheme; In order to effectuate a genuine
withdrawal from a conspiracy, a defendant must terminate completely his active involvement in the
conspiracy, as well as take affirmative steps to defeat or disavow the conspiracy's purpose, citing
United States v. Hargrove, 508 F.3d 445, 449 (7th Cir. 2007)).
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charged, In re Winship, 397 U. S. 358 (1970), [p]roof of the nonexistence of all

affirmative defenses has never been constitutionally required, Patterson v. New
York, 432 U. S. 197, 210 (1977). The State is foreclosed from shifting the burden of
proof to the defendant only when an affirmative defense does negate an element of
the crime. Martin v. Ohio, 480 U. S. 228, 237 (1987) (Powell, J., dissenting). Where
instead it excuse[s] conduct that would otherwise be punishable, but does not
controvert any of the elements of the offense itself, the Government has no
constitutional duty to overcome the defense beyond a reasonable doubt. Dixon v.
United States, 548 U. S. 1, 6 (2006).
Withdrawal does not negate an element of the conspiracy crimes charged
here. The essence of conspiracy is the combination of minds in an unlawful
purpose. United States v. Hirsch, 100 U. S. 33, 34, 25 L. Ed. 539 (1879). To convict
a defendant of narcotics or RICO conspiracy, the Government must prove beyond
a reasonable doubt that two or more people agreed to commit a crime covered by the
specific conspiracy statute (that a conspiracy existed) and that the defendant
knowingly and willfully participated in the agreement (that he was a member of the
conspiracy). Far from contradicting an element of the offense, withdrawal
presupposes that the defendant committed the offense. Withdrawal achieves more
modest ends than exoneration. Since conspiracy is a continuing offense, United
States v. Kissel, 218 U. S. 601, 610 (1910), a defendant who has joined a conspiracy
continues to violate the law through every moment of [the conspiracys] existence,
Hyde v. United States, 225 U. S. 347, 369 (1912), and he becomes responsible for
the acts of his co-conspirators in pursuit of their common plot, Pinkerton v. United
States, 328 U. S. 640, 646 (1946). Withdrawal terminates the defendants liability for
postwithdrawal acts of his co-conspirators, but he remains guilty of conspiracy.
Withdrawal also starts the clock running on the time within which the
defendant may be prosecuted, and provides a complete defense when the withdrawal
occurs beyond the applicable statute-of-limitations period. A complete defense,
however, is not necessarily one that establishes the defendants innocence. For
example, we have held that although self-defense may entirely excuse or justify
aggravated murder, the elements of aggravated murder and self-defense [do not]
overlap in the sense that evidence to prove the latter will often tend to negate the
former. Martin, supra, at 234; see Leland v. Oregon, 343 U. S. 790, 794-796 (1952)
(same for insanity defense). Likewise, although the statute of limitations may inhibit
prosecution, it does not render the underlying conduct noncriminal. Commission of
the crime within the statute-of-limitations period is not an element of the conspiracy
offense. See United States v. Cook, 84 U.S. 168 (1872). The Government need not
allege the time of the offense in the indictment, id., at 179-180, and it is up to the
defendant to raise the limitations defense, Biddinger v. Commissioner of Police of
City of New York, 245 U. S. 128, 135 (1917). A statute-of-limitations defense does
not call the criminality of the defendants conduct into question, but rather reflects
a policy judgment by the legislature that the lapse of time may render criminal acts
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ill suited for prosecution. See, e.g., Toussie v. United States, 397 U. S. 112, 114-115
(1970). Thus, although union of withdrawal with a statute-of-limitations defense can
free the defendant of criminal liability, it does not place upon the prosecution a
constitutional responsibility to prove that he did not withdraw. As with other
affirmative defenses, the burden is on him.
III
Of course, Congress may choose to assign the Government the burden of
proving the nonexistence of withdrawal, even if that is not constitutionally required.
It did not do so here. [T]he common-law rule was that affirmative defenses . . . were
matters for the defendant to prove. Martin, supra, at 235; see 4 W. Blackstone,
Commentaries on the Laws of England 201 (1769). Because Congress did not
address in 21 U. S. C. 846 or 18 U. S. C. 1962(d) the burden of proof for
withdrawal, we presume that Congress intended to preserve the common-law rule.
Dixon, 548 U. S., at 13-14.
That Congress left the traditional burden of proof undisturbed is both
practical and fair. [W]here the facts with regard to an issue lie peculiarly in the
knowledge of a party, that party is best situated to bear the burden of proof. Id., at
9. On the matter of withdrawal, the informational asymmetry heavily favors the
defendant. Passive nonparticipation in the continuing scheme is not enough to sever
the meeting of minds that constitutes the conspiracy. [T]o avert a continuing
criminality there must be affirmative action . . . to disavow or defeat the purpose
of the conspiracy. Hyde, supra, at 369. The defendant knows what steps, if any, he
took to dissociate from his confederates. He can testify to his act of withdrawal or
direct the court to other evidence substantiating his claim. n5 It would be nearly
impossible for the Government to prove the negative that an act of withdrawal never
happened. See 9 J. Wigmore, Evidence 2486, p. 288 (J. Chadbourn rev. 1981) (It
is often said that HN15the burden is upon the party having in form the affirmative
allegation). Witnesses with the primary power to refute a withdrawal defense will
often be beyond the Governments reach: The defendants co-conspirators are likely
to invoke their right against self-incrimination rather than explain their unlawful
association with him.
n5 Here, Smith introduced a stipulation of his dates spent incarcerated, as
well as testimonial evidence showing that he was no longer a member of the
charged conspiracies during his incarceration. Brief for Petitioner 3. The
jury found that this did not establish by a preponderance of the evidence an
affirmative act of withdrawal.
Here again, the analysis does not change when withdrawal is the basis for a
statute-of-limitations defense. To be sure, we have held that the Government must
prove the time of the conspiracy offense if a statute-of-limitations defense is raised.
Grunewald v. United States, 353 U. S. 391, 396 (1957). But the Government satisfied
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that burden here when it proved that the conspiracy continued past the
statute-of-limitations period. For the offense in these conspiracy prosecutions was
not the initial act of agreement, but the banding-together against the law effected by
that act, which continues until termination of the conspiracy or, as to a particular
defendant, until that defendants withdrawal. And as we have discussed, the burden
of establishing that withdrawal rests upon the defendant.
Petitioners claim that assertion of a statute-of-limitations defense shifts that
burden is incompatible with the established proposition that a defendants
membership in the conspiracy, and his responsibility for its acts, endures even if he
is entirely inactive after joining it. (As he has started evil forces he must withdraw
his support from them or incur the guilt of their continuance. Hyde, 225 U. S., at
369-370.) For as a practical matter, the only way the Government would be able to
establish a failure to withdraw would be to show active participation in the
conspiracy during the limitations period.
***
Having joined forces to achieve collectively more evil than he could
accomplish alone, Smith tied his fate to that of the group. His individual change of
heart (assuming it occurred) could not put the conspiracy genie back in the bottle.
We punish him for the havoc wreaked by the unlawful scheme, whether or not he
remained actively involved. It is his withdrawal that must be active, and it was his
burden to show that.
The judgment of the Court of Appeals is affirmed.420
m.
Hearsay of Co-Conspirator Admissible.
In addition to adding sex to the case, the conspiracy charge may permit the Government
to introduce evidence that it could not have otherwise introduced. Rule 801(d)(2)(E), Federal Rules
of Evidence, provides that a statement is not hearsay if the statement is offered against a conspirator
and is made by the party's coconspirator during and in furtherance of the conspiracy. The
statement must be considered, but alone will not establish the existence of the conspiracy or
participation in it. Id. The Government must prove and the district court must find by a
preponderance of the evidence that (1) a conspiracy existed; (2) the conspiracy included the
declarant and the defendant against whom the statement is offered; and (3) the statement was made
during the course and in furtherance of the conspiracy.421 When the proof is made, the statement
420
Smith v. United States, ___ U.S. ___, 2013 U.S. LEXIS 601 (2013) (parallel citations
and most footnotes omitted).
421
United States v. Hasner, 340 F .3d 1261, 1274 (11th Cir. 2003). See Bourjaily v.
United States, 483 U.S. 171 (1987). Rule 801(d)(2)(E) was subsequently amended to adopt some
aspects of Bourjaily. See also United States v. Coplan, ___ F.3d ___, ___, 2012 U.S. App. LEXIS
24613 (2d Cir. 11/29/12) (citing Bourjaily). To show the potential scope of this exception to the
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becomes like an admission against interest, another exception to the hearsay rule.422 And, the
statement can clear the Sixth Amendment Confrontation Guarantee.423
Obviously, the admission of hearsay under this exception must come in during the trial
before there is a determination by the jury of the actual existence of a conspiracy (if charged). In
a criminal trial, the Government is usually the proponent of the evidence against the defendant. The
trial judge must satisfy himself by a preponderance of the evidence that the conspiracy exists and
the party opponents participation in the conspiracy.424 Sometimes, depending upon the evidence,
the trial court may conditionally admit the evidence subject to connection which means that the
jury will be instructed to ignore the evidence if there is no eventual connection.425
E.
False Statements (18 U.S.C. 1001).

1.
The Statute.
Sec. 1001. Statements or entries generally

(a) Except as otherwise provided in this section, whoever, in any matter
within the jurisdiction of the executive, legislative or judicial branch of the
Government of the United States,426 knowingly and willfully
hearsay rule, in Coplan, the Government identified 50 people as co-conspirators with the indicted
defendants.
422
See also FRE Rule 804(b)(3) (declaration against penal interest).
423
In Crawford v. Washington, 541 U.S. 36 (2004), the Court announced a revised view
of the Confrontation Clause. In Ohio v. Roberts, 448 U.S. 56 (1980), the Court held that that the
Confrontation Clause does not bar admission of an unavailable witness's statement against a criminal
defendant if the statement bears adequate indicia of reliability, a test met when the evidence
either falls within a firmly rooted hearsay exception or bears particularized guarantees of
trustworthiness. Reversing that holding in Roberts, Crawford adopted a categorical rule barring
the admission of out-of-court testimonial statements against the accused absent opportunity for
cross-examination. However, the Courts have sustained the use of even testimonial flavored
statements made in furtherance of the conspiracy. United States v. Stewart, 433 F.3d 273 (2d Cir.
2006); and United States v. Holmes, 406 F.3d 337 (5th Cir. 2005).
424
See e.g., United States v. Geaney, 417 F.2d 1116, 1120 (2d Cir. 1969) (When the
matter is viewed from the standpoint of the trial judge, it may be hard to say more than that he must
satisfy himself of the defendant's participation in a conspiracy on the basis of the non-hearsay
evidence.). In burden of proof terms, that satisfaction should be by a preponderance of the
evidence. Bourjaily v. United States, 483 U.S. 171, 175 (1987).
425
United States v. Geaney, supra; the procedure was approved in Bourjaily v. United
States, 483 U.S. 171, 181 (1987).
426
As noted in CTM 24.01 fn. 1 (2008 ed.), The False Statements Accountability Act
of 1996, Pub. L. No. 104-292, 110 Stat. 3459, expanded the application of the statute to cover
executive, legislative and judicial branches of the Government. As interpreted in Hubbard v. United
States, 514 U.S. 695, 702-03 (1995), the statute previously had applied only to false statements made
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(1) falsifies, conceals or covers up by any trick, scheme or device a

material fact;
(2) makes any materially false, fictitious, or fraudulent statement or
representation; or
(3) makes or uses any false writing or document knowing the same
to contain any materially false, fictitious or fraudulent statement or entry;
shall be fined under this title or imprisoned not more than 5 years or both.
The principal focus in this discussion is (a)(2), dealing with false statements, which was the
gravamen of the crime before the addition of (1) and (3).427 In the criminal tax arena, this is the one
historically in play. Unless otherwise noted specifically, the discussion in this section of the text
relates to (a)(2).
2.
The Elements.
The Fifth Circuit Pattern Jury Instruction provides:

Title 18, United States Code, Section 1001, makes it a crime for anyone to
knowingly and willfully make a false or fraudulent statement to a department or
agency of the United States.
First: That the defendant made a false statement to _______ [name
department or agency of United States government];
Second: That the defendant made the statement intentionally, knowing that
it was false;
Third: That the statement was material, and
Fourth: That the defendant made the false statement for the purpose of
misleading the _______ [name department or agency].
A statement is material if it has a natural tendency to influence, or is capable
of influencing, a decision of [name department or agency].
It is not necessary to show that the _______ [name department or agency]
was in fact misled.428
to the executive branch. The CTM notes, however, that the prohibition does not apply to a party to
a judicial proceeding, or to that party's counsel, for statements, representations, writings or
documents submitted by such party or counsel to a judge or magistrate in that proceeding. 18
U.S.C. 1001(b).
427
The statute was amended by the False Statements Accountability Act of 1996, Pub.
L. No. 104-292, 110 Stat. 3459. Prior to the amendment, 1001 criminalized false statements made
to any United States agency.
428
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3.
Materials.
a.
Basis for the Crime.
18 U.S.C. 1001 is predicated on the Governments right to ask questions and receive honest
answers so that it can somewhat efficiently go about the business of governing. As the Supreme
Court said in Bryson v. United States:429
Our legal system provides methods for challenging the Government's right to ask
questions -- lying is not one of them. A citizen may decline to answer the question,
or answer it honestly, but he cannot with impunity knowingly and willfully answer
with a falsehood.
b.
Intent to Deceive.
Under (a)(2), an intent to deceive is not an express element of the crime. Some courts hold,
however, that the intent to deceive is an implicit element that must be proved by the Government;430
others hold that, so long as the defendant knows the statement is materially false, there is no separate
element requiring that he intended to deceive.
c.
Knowingly and Willfully.
The false statement must be made knowingly and willfully. As I noted earlier in the text,
willfully is a word of many nuances. Certainly, in a tax crimes context, willfully means at a
minimum knowing that the conduct is illegal. So, the question is which nuance applies to 1001?
Does the speaker commit the crime by making a knowingly false statement to a federal agent or
must the speaker also know that making a knowingly false statement to a federal agent is a crime?
The CTM says cryptically on this issue: As used in Section 1001, the term "willful" simply means
that the defendant did the forbidden act (e.g., made a false, fictitious, or fraudulent statement)
deliberately and with knowledge.431 With knowledge of what the falsity or the falsity and its
criminality? I think the CTM fairly read intends the former rather than the latter.
In a recent case,432 Judge Kavanaugh in a concurring opinion focused on this issue although
siding with the majority because the defendant had not properly raised the issue at trial. The facts,
highly summarized, are that, incident to a drug investigation, the USPS intercepted a drug package
addressed to "Karen White" and then, after substituting white powder for the drug, had a USPS
employee deliver it to the address. At the address, the USPS employee delivered the package to the
429
396 U.S. 64, 70 (1969).

E.g., United States v. Corsino, 812 F.2d 26, 29 (1st Cir. 1987); United States v. Shah,
44 F.3d 285, 289 (5th Cir. 1995); but see dicta in United States v. Yanum, 96 F.3d 1020 (7th Cir.
1996), interpreting United States v. Yermian, 468 U.S. 63 (1984).
431
CTM 24.08 (2008) (and cases there cited).
432
United States v. Moore, 612 F.3d 698 (D.C. Cir. 2010).
430
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defendant, a male, upon his representation that he was Karen White's boyfriend and upon his signing
the receipt with a false name. The defendant was thereafter first charged with drug crimes and the
jury hung. He was tried a second time for the same charges but with a false statement charge added
for his conduct in accepting the package. In the second trial, the jury hung again on the drug charges
but convicted on the false statement charge. On appeal, Moore urged that the falsity was not
materially false (another element in 1001). The panel unanimously handily rejected that
argument. Speaking to the substantive issue of whether "knowingly and willfully" requires
knowledge of criminality, Judge Kavanagh echoed the concerns of Judge Kozinski of the Ninth
Circuit in dealing with the somewhat amorphous crime of the defraud conspiracy (the Klein
conspiracy in tax context). That is not surprising because, as Judge Kavanaugh cites, Judge
Kozinski has addressed this concern in the context of 18 USC 1001. I quote:433
Proper application of statutory mens rea requirements and background mens
rea principles can mitigate the risk of abuse and unfair lack of notice in prosecutions
under 1001 and other regulatory statutes. In 1001 cases, that means proof that the
defendant knew that making the false statement would be a crime. To be sure,
ignorance of law is no defense is a hoary maxim. But it does not automatically
apply to today's phalanx of federal regulatory crimes. See WAYNE R. LAFAVE,
CRIMINAL LAW 5.6, at 298-311 (5th ed.2010). For some regulatory offenses -particularly statutes like 1001 that proscribe only willful conduct -- the Supreme
Court has recognized an ignorance-of-law or mistake-of-law defense, or has required
affirmative proof of the defendant's knowledge that his or her conduct was unlawful.
See Bryan v. United States, 524 U.S. 184 (1998); Ratzlaf v. United States, 510 U.S.
135, 141-49 (1994); Cheek v. United States, 498 U.S. 192, 199-201 (1991); Lambert
v. California, 355 U.S. 225, 229-30 (1957); cf. Liparota v. United States, 471 U.S.
419 (1985); Dan M. Kahan, Ignorance of Law Is an Excuse -- But Only for the
Virtuous, 96 MICH. L. REV. 127, 150 (1997) (noting that courts permit mistake of
law as a defense [] selectively across malum prohibitum crimes). For criminal
statutes prohibiting "willful" violators, those cases together require proof that the
defendant was aware that the conduct was unlawful.
In Bryan, the Supreme Court summarized the rule quite clearly: [I]n order
to establish a willful violation of a statute, the Government must prove that the
defendant acted with knowledge that his conduct was unlawful. 524 U.S. at 191-92
(internal quotation marks omitted). Since Bryan, the Court has reiterated this
formulation on several occasions. See also Safeco Ins. Co. of America v. Burr, 551
U.S. 47, 57 n.9 (2007) (we have consistently held that a defendant cannot harbor
such criminal intent unless he acted with knowledge that his conduct was unlawful)
(internal quotation marks omitted); Dixon v. United States, 548 U.S. 1, 5, 126 S. Ct.
2437, 165 L. Ed. 2d 299 (2006) (the term willfully requires a defendant to have
acted with knowledge that his conduct was unlawful) (internal quotation marks
omitted).*
433
Pp. 703 - 704. Parallel citations omitted.
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n* To say that the Government must prove the defendant knew the conduct was a
crime is not necessarily to say that the Government must prove the defendant knew
the specific code provision proscribing the conduct, except with respect to certain
highly technical statutes. See Bryan, 524 U.S. at 194; cf. Ratzlaf, 510 U.S. at 141
(anti-structuring statute); Cheek, 498 U.S. at 200 (tax statute).
It is true that our Court many years ago seemed to assume (in addressing a
mens rea issue under a different statute) that proving the defendant's knowledge of
the law may not be required in 1001 cases. See United States v. Hsia, 176 F.3d
517, 522 n.3 (D.C. Cir. 1999). In so doing, Hsia referenced a 1994 Third Circuit
opinion that pre-dated the Supreme Court's clarifying decisions in Bryan and later
cases. That assumption may not endure in light of those subsequent Supreme Court
precedents. In a future case, we therefore may need to consider the appropriate mens
rea requirements and defenses for 1001 prosecutions under those Supreme Court
decisions.
Here, however, there is no legal obstacle to our affirming Moore's 1001
conviction: Moore did not contend that the term "willfully" in 1001 requires proof
of the defendant's knowledge of the law, and he did not challenge the jury
instructions on that basis. But in a case where the issue is raised, the Supreme Court's
precedents arguably require district courts in 1001 cases to give a willfulness
instruction that requires proof that the defendant knew his conduct was a crime. To
be sure, in many false statements cases the Government will be able to easily prove
that the defendant knew his conduct was unlawful. But in some cases, it will not be
able to do so -- and those of course are precisely the cases where it would seem
inappropriate and contrary to 1001's statutory text to impose criminal punishment.
Notice that Judge Kavanaugh repeats in the footnote the notion that Bryan requires proof that the
defendant knew of the specific Code provision he or she intended to violate. Readers might review
again, the discussion of this issue on page 11, above. Setting that aside, it is clear that Cheek
requires the element that the defendant knew the conduct was illegal and intended to do the illegal
act. That is the point to which Judge Kavanaugh focuses his fire.
Finally, as to the knowingly and willfully element, the CTM says that several courts permit
the element to be met by proof of willful blindness or conscious avoidance.434
d.
Relationship to Perjury.
Section 1001(a)(2) is a perjury-type statute that does not require that the false statement be
made oath or under penalty of perjury. Certainly, false statements made to an IRS agent within the
scope of the agents duties that would be perjury if made under penalty of perjury will be
prosecutable under 1001. The question I ask you to consider here is whether 1001 is broader in
scope and criminalizes statements that would not be subject to a perjury charge if made under oath.
434
CTM 24.08 (2008 ed.).
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The Supreme Court held in Bronston v. United States435 that in perjury prosecution under 18
U.S.C. 1621 literal truth of the statement even if intended to mislead is a defense. There, the
defendants corporation was in a Chapter 11 bankruptcy proceeding. The trustee in bankruptcy held
a hearing to determine the extent and location of the corporations assets. At the hearing, a lawyer
for a creditor asked the following questions:
Q.
A.
Q.
A.
Q.
A.
Q.
A.
Do you have any bank accounts in Swiss banks, Mr. Bronston?

No, sir.
Have you ever?
The company had an account there for about six months, in Zurich.
Have you any nominees who have bank accounts in Swiss banks?
No, sir.
Have you ever?
No, sir.
The Court noted that it was undisputed that the defendant, in his individual capacity, had a
Swiss bank account at an earlier point. Nevertheless, the answers he gave were literally true. Only
the second question, if properly answered, would have required an answer that would have disclosed
the Swiss account, but he chose to deflect that question. The question was whether he ever had a
Swiss bank account. Rather than answering that question, the defendant said that the corporation
had one for six months. Then, rather than re-focusing the defendant on the question asked and not
answered whether the defendant ever had a bank account the lawyer for the creditor moved on,
probably upon the notion that assuming an implicit representation that the defendant had not had
such an account. Accordingly, the Court concluded: It is likewise undisputed that petitioner's
answers were literally truthful. (a) Petitioner did not at the time of questioning have a Swiss bank
account. (b) Bronston Productions, Inc., did have the account in Zurich described by petitioner. (c)
Neither at the time of questioning nor before did petitioner have nominees who had Swiss accounts.
The Court noted that: The Government's prosecution for perjury went forward on the theory
that in order to mislead his questioner, petitioner answered the second question with literal
truthfulness but unresponsively addressed his answer to the company's assets and not to his own -thereby implying that he had no personal Swiss bank account at the relevant time. The Court
rejected that prosecution theory, noting (pp. 357-359):
Beyond question, petitioner's answer to the crucial question was not responsive if we
assume, as we do, that the first question was directed at personal bank accounts.
There is, indeed, an implication in the answer to the second question that there was
never a personal bank account; in casual conversation this interpretation might
reasonably be drawn. But we are not dealing with casual conversation and the
statute does not make it a criminal act for a witness to willfully state any material
matter that implies any material matter that he does not believe to be true.
435
409 U.S. 352 (1973).
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* * * we perceive no reason why Congress would intend the drastic sanction of a

perjury prosecution to cure a testimonial mishap that could readily have been reached
with a single additional question by counsel alert -- as every examiner ought to be
-- to the incongruity of petitioner's unresponsive answer. Under the pressures and
tensions of interrogation, it is not uncommon for the most earnest witnesses to give
answers that are not entirely responsive. Sometimes the witness does not understand
the question, or may in an excess of caution or apprehension read too much or too
little into it. It should come as no surprise that a participant in a bankruptcy
proceeding may have something to conceal and consciously tries to do so, or that a
debtor may be embarrassed at his plight and yield information reluctantly. It is the
responsibility of the lawyer to probe; testimonial interrogation, and
cross-examination in particular, is a probing, prying, pressing form of inquiry. If a
witness evades, it is the lawyer's responsibility to recognize the evasion and to bring
the witness back to the mark, to flush out the whole truth with the tools of adversary
examination. It is no answer to say that here the jury found that petitioner intended
to mislead his examiner. A jury should not be permitted to engage in conjecture
whether an unresponsive answer, true and complete on its face, was intended to
mislead or divert the examiner; the state of mind of the witness is relevant only to the
extent that it bears on whether he does not believe [his answer] to be true. To hold
otherwise would be to inject a new and confusing element into the adversary
testimonial system we know. Witnesses would be unsure of the extent of their
responsibility for the misunderstandings and inadequacies of examiners, and might
well fear having that responsibility tested by a jury under the vague rubric of intent
to mislead or perjury by implication.
The Court later continued (361-362):
Though perhaps a plausible argument can be made that unresponsive answers are
especially likely to mislead, any such argument must, we think, be predicated upon
the questioner's being aware of the unresponsiveness of the relevant answer. Yet, if
the questioner is aware of the unresponsiveness of the answer, with equal force it can
be argued that the very unresponsiveness of the answer should alert counsel to press
on for the information he desires. It does not matter that the unresponsive answer is
stated in the affirmative, thereby implying the negative of the question actually
posed; for again, by hypothesis, the examiner's awareness of unresponsiveness
should lead him to press another question or reframe his initial question with greater
precision. Precise questioning is imperative as a predicate for the offense of perjury.
It may well be that petitioner's answers were not guileless but were shrewdly
calculated to evade. Nevertheless, we are constrained to agree with Judge Lumbard,
who dissented from the judgment of the Court of Appeals, that any special problems
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arising from the literally true but unresponsive answer are to be remedied through
the questioner's acuity and not by a federal perjury prosecution. 436
Bronston is frequently cited for the proposition that literal truth is a defense to a charge of
perjury.437 Actually, Bronston involved an unresponsive literal truth intended to mislead (or at least
avoid the question that was asked). Usually, the battle ground where the defendant raises Bronston
as a defense to perjury is the responsive answer that the defendant argues could be literally true even
if intended to mislead. Consider this example based on an actual case438 (in a movie sense) for a
charge of perjury from a Q&A in a grand jury room.
Q. Did the drug dealer give you the drugs?
A. No.
The context leading up to this crisp Q&A is that Government attorney used the word give in a
general sense just a transfer and not just a gift transfer without any consideration (drug dealers do
not generally give away drugs). The grand jury witness is charged with perjury for that answer. The
Government proves the drug purchase and the delivery of the drugs. Is truth a defense? No. Even
though the literal question without context may be capable of more than one interpretation and it is
not impossible that the grand jury witness interpreted the question in the more technical gift sense,
the jury is entitled to consider context in answering the ultimate question which is not whether the
witness could have had some other understanding that would make the answer literally in his or her
mind, but whether the witness actually had that understanding of what the prosecutor was asking.
As stated by the Ninth Circuit, the issue is whether the jury could conclude beyond a reasonable
doubt that the defendant understood the question as did the government and that, so understood, the
defendant's answer was false.439
436
See also United States v. Shotts, 145 F.3d 1289, 1299 (11th Cir. 1998), where the
court treated the stock ownership question as, in context, vague and held: Even if Shotts' answer
[as to stock ownership] was evasive, non-responsive, intentionally misleading and arguably false,
it was literally true and cannot support a conviction under Section 1623.
437
Just how literal must the truth be in order to secure this blessing of Bronston. Ah,
there lies the rub. See United States v. Fulbright, 804 F.2d 847 (5th Cir. 1986) (defendants
conviction of perjury sustained: defendant was asked if he met a person in New Orleans and
answered no, when he had indeed met the person in a suburb of New Orleans; it all depended upon
what New Orleans meant (sort of like what is, is), and the Fifth Circuit said he was too literal in
trying to weasel out by unilaterally confining his no response to just the city and not the suburbs;
I am not as assured as the Fifth Circuit that that narrow approach to Bronston is appropriate, but I
do think courts will strain to sustain a conviction of those the court thinks are worthy.)
438
United States v. Thomas, 612 F.3d 1107 (9th Cir. 2010).
439
United States v. Thomas, 612 F.3d 1107, 1116 (9th Cir. 2010) (internal quotes omitted
for the quotation from United States v. Sainz, 772 F.2d 559, 562 (9th Cir. 1985)); see also United
States v. Ahmed, 472 F.3d 427, 432 (6th Cir. 2006) (the possibility that a defendant can postulate
unstated premises of the question that would make his answer literally true does not bar the
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Obviously, the question is the relevance of the Bronston analysis to the false statement
charge under 1001 which is the more commonly encountered perjury like charge in tax crimes
where the taxpayer makes statements to the agent or the attorney assisting the grand jury. The cases
that brush up against this issue usually but not always treat Bronston as setting the standard for
a 1001 charge,440 and indeed the CTM suggests that as well.441 I think we could dance on the head
possibility of liability.); and United States v. Damrah, 412 F.3d 618, 626 (6th Cir. 2005) (a
defendants actual understanding of the questions and the resulting intent of the answers given are
jury questions). In United States v. Sarwari, 669 F.3d 401 (4th Cir. 2012), the Court undertook a
similar analysis in the context of a prosecution under 18 U.S.C. 1542 for willfully and knowingly
making a false statement on a passport application. The defendant was originally from Afghanistan
and have become a U.S. citizen. He applied to have his step-children, also from Afghanistan
admitted to the U.S. He stated on the application that they were his children. Further, he obtained
birth certificates from the Afghanistan Embassy stating that he was their father. The step-children
as such were clearly not entitled to be admitted. He raised the Bronston defense that the answer was
literally true but blended it with the notion that the question was ambiguous as to whether it could
cover a step-child. The Court read Bronston as applying only where a defendant's allegedly false
statements "were undisputedly literally true," quoting Thomas. Thus, so interpreted, an ambiguous
question does not permit the defense. However, while a fundamentally ambiguous question cannot
form the basis for a perjury-like prosecution, the Court held that the question was not so
fundamentally ambiguous. Rather, any ambiguity permitted only a good faith defense i.e., if the
person responding to the question in good faith interpreted the question he or she was answering to
request the answer which was given (the literally true answer on that interpretation), then the person
has a good faith defense. In Sarwari, the jury had been properly instructed that a good faith answer
was a complete defense, and the jury determined that the defendant was guilty. This meant that the
jury determined that the defendant knew he was falsely answering at best what was potentially an
ambiguous question but which he actually understood. Other than courts trying to limit the scope
of Bronston, it is not evident to me that, if the question was not ambiguous to the defendant and he
answered it with a literal truth, why this would not permit the Bronston defense.
440
E.g., United States v. Good, 326 F.2d 589, 592 (4th Cir. 2003), holding:
The principle articulated in Bronston holds true for convictions under Section 1001
and in this case today. See Mandanici, 729 F.2d at 921 (2d Cir. 1984); United States
v. Moses, 94 F.3d 182, 188-89 (5th Cir. 1996) (We cannot uphold a conviction . .
. where the alleged statement forming the basis of a violation of section 1001 is true
on its face.); United States v. Vesaas, 586 F.2d 101, 104 (8th Cir. 1978) ([A]
prosecution for a false statement under 1001 or under the perjury statutes cannot
be based on an ambiguous question where the response may be literally and factually
correct.) (citing Bronston, 409 U.S. at 366). The defendant's response to the
question was literally true, and thus, her indictment charging a violation of Section
1001 was properly dismissed.
In a nontax case, the Third Circuit in United States v. Serafini, 167 F.3d 812 (3d Cir. 1999),
described as a close cousin to perjury and applied Bronston. See United States v. Castro, ___ F.3d
___, ___ 2013 U.S. App. 442 (3d Cir. 2013) (citing Serafini).
441
CTM 24.04(2008 ed.) (The court [Second Circuit] has also stated that a defendant
may not be convicted under Section 1001 for a statement that is, although misleading, literally true".
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of a pin in debating this issue, but I think there is most unlikely to be a real world case where
1001(a)(2) would apply where, in a sworn testimony setting, perjury would not.442
You surely recognize that this risk is an ever present danger in audits, particularly when the
agent is beginning to sense some significant civil tax adjustment. Since he has not yet focused upon
the particular facts, his questions may be unfocused, and the taxpayer and the practitioner (who do
know the real facts) need to be careful how they respond. Lets say the agent asks what does the
taxpayers books and records show income other than reported on the return.443 If the taxpayer has
income that is off the books (all cash, used for partying, producing no records anywhere), a truthful
response to is that the taxpayers books show no income other than reported. No false statement
there. What if the question were did the taxpayer have income other than reported on the return
and the same response is given. That is sort of like Bronston. That is a clear signal that the question
asked was not answered and follow through is required from the questioner. In an adversary hearing
context, Bronston establishes that there is no problem where the answer is literally true even if
misleading and, certainly, there would be no perjury problem in litigation if the answerer expressly
makes clear which question, different than the questioner asked, he is answering. So too, it would
seem that there should be no problem in the Section 1001, so long as the answerer makes clear that
he is answering a question other than asked by the examiner.
As noted, I would argue that in an audit context, which is inherently adversarial, the
examiners responsibility is to pick up on shifts in focus of answers and follow through if he is not
United States v. Mandanici, 729 F.2d 914, 921 (2d Cir. 1984) (citing Bronston v. United States, 409
U.S. 352, 359-62 (1973)). See also CTM 24.08 (2008 ed.).
442
CTM 24.05 (2008 ed.) does hint at a broader scope for 1001 false statements by
creating a misimpression (I avoided saying false statement) as to Bronston:
However, the Supreme Court also said in Bronston, 409 U.S. at 358 n.4, that a
different standard applies to criminally fraudulent statements, noting that, in that
context, the law goes rather far in punishing the intentional creation of false
impressions by a selection of literally true representations, because the actor himself
generally selects and arranges the representations.
It is unclear what import the Government attaches to that, because the Court was not speaking to
1001 but to criminally fraudulent statements. There is no requirement in Section 1001 that
statements be fraudulent, just that they be false.
In earlier editions of this text provided more discussion of this issue and the perception that,
in an earlier version of the CTM, DOJ CTM may have claimed a broader scope for 1001 than for
perjury. The current version of the CTM (the 2008 edition at 24.05) relies on the same authority as
the earlier versions (Peterson v. United States, 344 F.2d 419 (5th Cir. 1965)), but appears to give
Peterson a more constrained reading. A later Fifth Circuit case also constrained the reading of
Peterson. United States v. Moses, 94 F.3d 182, 188-89 (5th Cir. 1996) (We cannot uphold a
conviction . . . where the alleged statement forming the basis of a violation of section 1001 is true
on its face.). More importantly, the Peterson case seems to be basically the same holding as the
Thomas case cited above.
443
This example is inspired by Peterson discussed in the preceding footnote.
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sure that he got a responsive answer.444 Nevertheless, in eggshell civil audits, taxpayers and their
practitioners must be very careful as to what they say. Such audits are best handled by experienced
lawyers who should know where the skeletons lie and will avoid pitfalls that unsophisticated
taxpayers or unexperienced lawyers might fall or be led into.
e.
False Statements Not Yet Made.
What if a false statement has been uttered but not yet landed? A statement in motion, so to
speak.445 You ask what I am talking about? Consider this DOJ Tax Claim in the CTM:
Because the false statements or documents need not actually be received by
the executive, legislative or judicial branch, the Tax Division has authorized
prosecution under Section 1001 for false claims which have been prepared, but not
yet filed with the IRS. This scenario occurs, for example, in electronic filing
prosecutions in which the filer has been apprehended either after or at the time of the
presentation of a false claim to a tax filing service, but before transmission is
effectuated. Because the false claim has not been submitted to the IRS, the
commonly used 18 U.S.C. 287 charge is unavailable. Section 1001 provides a
mechanism by which these false claims can be prosecuted. See Section 22.08,
supra.446
Give me a break!
f.
The Judicial Function Exception.
Section 1001 was revised in 1996447 as a result of the Supreme Courts decision in Hubbard
v. United States448 which held that the predecessor to 1001 did not apply to judicial proceedings.
The statute now provides that false statements include false statements to the judicial branch.
Section 1001(b) codifies a judicial function exception to 1001. Without that exception,
statements made to a court by a lawyer or a defendant might be prosecutable under 1001. For
example, without the exception, would a plea of not guilty in a case where the defendant was in fact
444
One court has noted that in 1001 prosecutions the adversarial context of Bronston
may not be present and thus might invoke sufficiently different policies to support a prosecution
under 1001. United States v. Harrod, 981 F.2d 1171 (10th Cir. 1992). But, as indicated in the text
I would urge that the context is sufficiently adversarial to invoke Bronston in a 1001 context.
Moreover, with respect to 1001 invoking different policies thus justifying looser circumstances
for conviction, I dont think that is a mainstream holding, for the courts more typically cite Bronston
as being applicable in 1001 cases.
445
CTM 24.06 (2008).
446
CTM 24.06 (2008).
447
False Statements Accountability Act of 1996, Pub. L. No. 104-292, 110 Stat. 3459.
448
514 U.S. 695 (1995).
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guilty violate 1001? Or would some aggressive, albeit fairly routine, defense trial tactics be within
the scope of 1001? The exception is there, but, just as its judicial counterpart, its full scope will
have to be fleshed out in litigation. For example, in United States v. Tracy,449 in a judicial seizure
proceeding, the parties were admonished by the Court to work out their particular matter in dispute
privately. In negotiating a resolution, the defendant submitted a false affidavit to the AUSA. The
defendant urged that, because the false affidavits were submitted to the AUSA incident to the
pending proceeding, they were in effect submitted to the court so that, under Hubbards
interpretation of 1001 prior to the 1996 amendment, the defendant could not be guilty. The Court
held that the affidavits were submitted to the AUSA, not the court, and the United States Attorneys
office is clearly covered by Hubbards interpretation of 1001. As you can readily discern from
1001(b) above, this same result would apply under the current version of 1001.
Note that 1001(b) carves out a judicial exception only for a party to a proceeding and his
or her counsel. If the witness is not a party (as was the case in Bronston), does the Government now
have a tool ( 1001) that is more powerful than perjury? Does a court now have to warn the witness
that he or she is not only subject to penalties of perjury but also subject to false statement penalties?
g.
Materiality.
In the revision to 1001,450 Congress also clarified that materiality was an element under
each of the separate prongs of 1001(a). Prior to that time there had been some confusion regarding
the issue, although most courts took the Gaudin-like approach to read in a materiality requirement.451
h.
Exculpatory No.
Brogan v. United States, 522 U.S. 398 (1998)
JUSTICE SCALIA delivered the opinion of the Court.

This case presents the question whether there is an exception to criminal liability under 18
U.S.C. 1001 for a false statement that consists of the mere denial of wrongdoing, the so-called
exculpatory no.
449
108 F.3d 473 (2d Cir. 1997).

False Statements Accountability Act of 1996, Pub. L. No. 104-292, 110 Stat. 3459.
451
See United States v. Wells, 519 U.S. 482, 491 (1997) (holding that the crime of false
statement in 18 U.S.C. 1014, a similar false statement crime involving statements to a federally
insured bank, does not include a materiality requirement because the text does not require it, the
legislative history does not support it and there is no external referrant in the common law to imply
that Congress intended a materiality requirement); and Neder v. United States, 527 U.S. 1, 23 n. 7
(1999) (citing Wells). See CTM 24.07 (2008 ed.).
450
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I
While acting as a union officer during 1987 and 1988, petitioner James Brogan accepted cash
payments from JRD Management Corporation, a real estate company whose employees were
represented by the union. On October 4, 1993, federal agents from the Department of Labor and the
Internal Revenue Service visited petitioner at his home. The agents identified themselves and
explained that they were seeking petitioner's cooperation in an investigation of JRD and various
individuals. They told petitioner that if he wished to cooperate, he should have an attorney contact
the U.S. Attorney's Office, and that if he could not afford an attorney, one could be appointed for
him.
The agents then asked petitioner if he would answer some questions, and he agreed. One
question was whether he had received any cash or gifts from JRD when he was a union officer.
Petitioner's response was no. At that point, the agents disclosed that a search of JRD headquarters
had produced company records showing the contrary. They also told petitioner that lying to federal
agents in the course of an investigation was a crime. Petitioner did not modify his answers, and the
interview ended shortly thereafter.
Petitioner was indicted for accepting unlawful cash payments from an employer in violation
of 29 U.S.C. 186(b)(1), (a)(2), (d)(2), and making a false statement within the jurisdiction of a
federal agency in violation of 18 U.S.C. 1001. He was tried, along with several co-defendants,
before a jury in the United States District Court for the Southern District of New York, and was
found guilty. The United States Court of Appeals for the Second Circuit affirmed the convictions,
96 F.3d 35 (1996). We granted certiorari on the issue of the exculpatory no. 520 U.S. (1997).
II
At the time petitioner falsely replied no to the Government investigators' question, 18
U.S.C. 1001 (1988 ed.) provided:
Whoever, in any matter within the jurisdiction of any department or agency
of the United States knowingly and willfully falsifies, conceals or covers up by any
trick, scheme, or device a material fact, or makes any false, fictitious or fraudulent
statements or representations, or makes or uses any false writing or document
knowing the same to contain any false, fictitious or fraudulent statement or entry,
shall be fined not more than $10,000 or imprisoned not more than five years, or
both.
By its terms, 18 U.S.C. 1001 covers any false statement -- that is, a false statement of
whatever kind, * * * * The word no in response to a question assuredly makes a statement,
see e.g., Webster's New International Dictionary 2461 (2d ed. 1950) (def. 2: That which is stated;
an embodiment in words of facts or opinions), and petitioner does not contest that his utterance was
false or that it was made knowingly and willfully. In fact, petitioner concedes that under a literal
reading of the statute he loses. Brief for Petitioner 5.
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Petitioner asks us, however, to depart from the literal text that Congress has enacted, and to
approve the doctrine adopted by many Circuits which excludes from the scope of 1001 the
exculpatory no. The central feature of this doctrine is that a simple denial of guilt does not come
within the statute. * * * *. There is considerable variation among the Circuits concerning, among
other things, what degree of elaborated tale-telling carries a statement beyond simple denial. * * *
*. In the present case, however, the Second Circuit agreed with petitioner that his statement would
constitute a true 'exculpatory no' as recognized in other circuits, * * * but aligned itself with the
Fifth Circuit * * * in categorically rejecting the doctrine * * * *.
Petitioner's argument in support of the exculpatory no doctrine proceeds from the major
premise that 1001 criminalizes only those statements to Government investigators that pervert
governmental functions; to the minor premise that simple denials of guilt to government
investigators do not pervert governmental functions; to the conclusion that 1001 does not
criminalize simple denials of guilt to Government investigators. Both premises seem to us mistaken.
As to the minor: We cannot imagine how it could be true that falsely denying guilt in a Government
investigation does not pervert a governmental function. Certainly the investigation of wrongdoing
is a proper governmental function; and since it is the very purpose of an investigation to uncover the
truth, any falsehood relating to the subject of the investigation perverts that function. It could be
argued, perhaps, that a disbelieved falsehood does not pervert an investigation. But making the
existence of this crime turn upon the credulousness of the federal investigator (or the persuasiveness
of the liar) would be exceedingly strange; such a defense to the analogous crime of perjury is
certainly unheard-of. Moreover, as we will see, the only support for the perversion of
governmental functions limitation is a statement of this Court referring to the possibility (as
opposed to the certainty) of perversion of function -- a possibility that exists whenever investigators
are told a falsehood relevant to their task.
In any event, we find no basis for the major premise that only those falsehoods that pervert
governmental functions are covered by 1001. * * * *.
The second line of defense that petitioner invokes for the exculpatory no doctrine is
inspired by the Fifth Amendment. He argues that a literal reading of 1001 violates the spirit of
the Fifth Amendment because it places a cornered suspect in the cruel trilemma of admitting
guilt, remaining silent, or falsely denying guilt. Brief for Petitioner 11. This trilemma is wholly
of the guilty suspect's own making, of course. An innocent person will not find himself in a similar
quandary (as one commentator has put it, the innocent person lacks even a lemma, * * * *. And
even the honest and contrite guilty person will not regard the third prong of the trilemma (the
blatant lie) as an available option. The bon mot cruel trilemma first appeared in Justice Goldberg's
opinion for the Court in Murphy v. Waterfront Comm'n of N. Y. Harbor, 378 U.S. 52 * * * (1964),
where it was used to explain the importance of a suspect's Fifth Amendment right to remain silent
when subpoenaed to testify in an official inquiry. Without that right, the opinion said, he would be
exposed to the cruel trilemma of self-accusation, perjury or contempt. Id., at 55. In order to
validate the exculpatory no, the elements of this cruel trilemma have now been altered -ratcheted up, as it were, so that the right to remain silent, which was the liberation from the original
trilemma, is now itself a cruelty. We are not disposed to write into our law this species of
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compassion inflation. Whether or not the predicament of the wrongdoer run to ground tugs at the
heart strings, neither the text nor the spirit of the Fifth Amendment confers a privilege to lie.
Proper invocation of the Fifth Amendment privilege against compulsory self-incrimination allows
a witness to remain silent, but not to swear falsely. * * * * Petitioner contends that silence is an
illusory option because a suspect may fear that his silence will be used against him later, or may
not even know that silence is an available option. Brief for Petitioner 12-13. As to the former: It
is well established that the fact that a person's silence can be used against him -- either as substantive
evidence of guilt or to impeach him if he takes the stand -- does not exert a form of pressure that
exonerates an otherwise unlawful lie. * * * *. And as for the possibility that the person under
investigation may be unaware of his right to remain silent: In the modern age of frequently
dramatized Miranda warnings, that is implausible. Indeed, we found it implausible (or irrelevant)
30 years ago, unless the suspect was in custody or otherwise deprived of his freedom of action in
any significant way, Miranda v. Arizona, 384 U.S. 436 * * * (1966).
Petitioner repeats the argument made by many supporters of the exculpatory no, that the
doctrine is necessary to eliminate the grave risk that 1001 will become an instrument of
prosecutorial abuse. The supposed danger is that overzealous prosecutors will use this provision as
a means of piling on offenses -- sometimes punishing the denial of wrongdoing more severely than
the wrongdoing itself. The objectors' principal grievance on this score, however, lies not with the
hypothetical prosecutors but with Congress itself, which has decreed the obstruction of a legitimate
investigation to be a separate offense, and a serious one. It is not for us to revise that judgment.
Petitioner has been unable to demonstrate, moreover, any history of prosecutorial excess, either
before or after widespread judicial acceptance of the exculpatory no. And finally, if there is a
problem of supposed overreaching it is hard to see how the doctrine of the exculpatory no could
solve it. It is easy enough for an interrogator to press the liar from the initial simple denial to a more
detailed fabrication that would not qualify for the exemption.
III
***
In sum, we find nothing to support the exculpatory no doctrine except the many Court of
Appeals decisions that have embraced it. While communis error facit jus may be a sadly accurate
description of reality, it is not the normative basis of this Court's jurisprudence. Courts may not
create their own limitations on legislation, no matter how alluring the policy arguments for doing
so, and no matter how widely the blame may be spread. Because the plain language of 1001 admits
of no exception for an exculpatory no, we affirm the judgment of the Court of Appeals.
It is so ordered.
JUSTICE GINSBURG, with whom JUSTICE SOUTER joins, concurring in the judgment.
Because a false denial fits the unqualified language of 18 U.S.C. 1001, I concur in the
affirmance of Brogan's conviction. I write separately, however, to call attention to the extraordinary
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authority Congress, perhaps unwittingly, has conferred on prosecutors to manufacture crimes. I

note, at the same time, how far removed the exculpatory no is from the problems Congress
initially sought to address when it proscribed falsehoods designed to elicit a benefit from the
Government or to hinder Government operations.
I
At the time of Brogan's offense, 1001 made it a felony knowingly and willfully to make
any false, fictitious or fraudulent statements or representations in any matter within the
jurisdiction of any department or agency of the United States. 18 U.S.C. 1001 (1988 ed.). That
encompassing formulation arms Government agents with authority not simply to apprehend
lawbreakers, but to generate felonies, crimes of a kind that only a Government officer could prompt.
This case is illustrative. Two federal investigators paid an unannounced visit one evening
to James Brogan's home. The investigators already possessed records indicating that Brogan, a union
officer, had received cash from a company that employed members of the union Brogan served.
(The agents gave no advance warning, one later testified, because they wanted to retain the element
of surprise. App. 5.) When the agents asked Brogan whether he had received any money or gifts
from the company, Brogan responded No. The agents asked no further questions. After Brogan
just said No, however, the agents told him: (1) the Government had in hand the records indicating
that his answer was false; and (2) lying to federal agents in the course of an investigation is a crime.
Had counsel appeared on the spot, Brogan likely would have received and followed advice to amend
his answer, to say immediately: Strike that; I plead not guilty. But no counsel attended the
unannounced interview, and Brogan divulged nothing more. Thus, when the interview ended, a
federal offense had been completed -- even though, for all we can tell, Brogan's unadorned denial
misled no one.
A further illustration. In United States v. Tabor, 788 F.2d 714 (CA11 1986), an Internal
Revenue Service agent discovered that Tabor, a notary public, had violated Florida law by notarizing
a deed even though two signatories had not personally appeared before her (one had died five weeks
before the document was signed). With this knowledge in hand, and without warning Tabor of the
possible consequences of her statements, * * * the agent went to her home with a deputy sheriff and
questioned her about the transaction. When Tabor, regrettably but humanly, denied wrongdoing,
the Government prosecuted her under 1001. * * * * An IRS agent thus turned a violation of state
law into a federal felony by eliciting a lie that misled no one. (The Eleventh Circuit reversed the
1001 conviction, relying on the exculpatory no doctrine. Id., at 719.)
As these not altogether uncommon episodes show, 1001 may apply to encounters between
agents and their targets under extremely informal circumstances which do not sufficiently alert the
person interviewed to the danger that false statements may lead to a felony conviction. United
States v. Ehrlichman, 379 F. Supp. 291, 292 (DC 1974). Because the questioning occurs in a
noncustodial setting, the suspect is not informed of the right to remain silent. Unlike proceedings
in which a false statement can be prosecuted as perjury, there may be no oath, no pause to
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concentrate the speaker's mind on the importance of his or her answers. As in Brogan's case, the
target may not be informed that a false No is a criminal offense until after he speaks.
At oral argument, the Solicitor General forthrightly observed that 1001 could even be used
to escalate completely innocent conduct into a felony. * * * * More likely to occur, if an
investigator finds it difficult to prove some elements of a crime, she can ask questions about other
elements to which she already knows the answers. If the suspect lies, she can then use the crime she
has prompted as leverage or can seek prosecution for the lie as a substitute for the crime she cannot
prove. * * * * If the statute of limitations has run on an offense -- as it had on four of the five
payments Brogan was accused of accepting -- the prosecutor can endeavor to revive the case by
instructing an investigator to elicit a fresh denial of guilt. Prosecution in these circumstances is not
an instance of Government punishing the denial of wrongdoing more severely than the wrongdoing
itself, * * * it is, instead, Government generation of a crime when the underlying suspected
wrongdoing is or has become nonpunishable.
II
It is doubtful Congress intended 1001 to cast so large a net. * * * * [History Omitted.]
As the lower courts that developed the exculpatory no doctrine concluded, the foregoing
history demonstrates that 1001's purpose was to protect the Government from the affirmative,
aggressive and voluntary actions of persons who take the initiative; and to protect the Government
from being the victim of some positive statement which has the tendency and effect of perverting
normal and proper governmental activities and functions.* * * *. True, the 1934 amendment,
which added the current statutory language, was not limited by any specific set of circumstances that
may have precipitated its passage. * * * * Yet it is noteworthy that Congress enacted that
amendment to address concerns quite far removed from suspects' false denials of criminal
misconduct, in the course of informal interviews initiated by Government agents. * * * *
III
Even if the encompassing language of 1001 precludes judicial declaration of an
exculpatory no defense, the core concern persists: The function of law enforcement is the
prevention of crime and the apprehension of criminals. Manifestly, that function does not include
the manufacturing of crime. * * * * The Government has not been blind to this concern.
Notwithstanding the prosecution in this case and the others cited supra, at 2-3, and n. 2, the
Department of Justice has long noted its reluctance to approve 1001 indictments for simple false
denials made to investigators. Indeed, the Government once asserted before this Court that the
arguments supporting the exculpatory no doctrine are forceful even if not necessarily
dispositive. * * * *
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IV
The Court's opinion does not instruct lower courts automatically to sanction prosecution or
conviction under 1001 in all instances of false denials made to criminal investigators. The Second
Circuit, whose judgment the Court affirms, noted some reservations. That court left open the
question whether to violate Section 1001, a person must know that it is unlawful to make such a
false statement. United States v. Wiener, 96 F.3d 35, 40 (1996). And nothing that court or this
Court said suggests that the mere denial of criminal responsibility would be sufficient to prove such
[knowledge]. Ibid. Moreover, a trier of fact might acquit on the ground that a denial of guilt in
circumstances indicating surprise or other lack of reflection was not the product of the requisite
criminal intent, ibid., and a jury could be instructed that it would be permissible to draw such an
inference. Finally, under the statute currently in force, a false statement must be material to
violate 1001. See False Statements Accountability Act of 1996, Pub. L. 104-292, 2, 110 Stat.
3459.
The controls now in place, however, do not meet the basic issue, i.e., the sweeping generality
of 1001's language. Thus, the prospect remains that an overzealous prosecutor or investigator -aware that a person has committed some suspicious acts, but unable to make a criminal case -- will
create a crime by surprising the suspect, asking about those acts, and receiving a false denial.
Congress alone can provide the appropriate instruction.
****
In sum, an array of recommendations has been made to refine 1001 to block the statute's
use as a generator of crime while preserving the measure's important role in protecting the workings
of Government. I do not divine from the Legislature's silence any ratification of the exculpatory
no doctrine advanced in lower courts. The extensive airing this issue has received, however, may
better inform the exercise of Congress' lawmaking authority.
JUSTICE STEVENS, with whom JUSTICE BREYER joins, dissenting.
Although I agree with nearly all of what Justice Ginsburg has written in her concurrence-a
concurrence that raises serious concerns that the Court totally ignores-I dissent for the following
reasons.
The mere fact that a false denial fits within the unqualified language of 18 U.S.C. 1001 is
not, in my opinion, a sufficient reason for rejecting a well-settled interpretation of that statute. It is
not at all unusual for this Court to conclude that the literal text of a criminal statute is broader than
the coverage intended by Congress. * * * * Although the text of 1001, read literally, makes it a
crime for an undercover narcotics agent to make a false statement to a drug peddler, I am confident
that Congress did not intend any such result. As Justice Ginsburg has explained, it seems equally
clear that Congress did not intend to make every exculpatory no a felony.
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Even if that were not clear, I believe the Court should show greater respect for the virtually
uniform understanding of the bench and the bar that persisted for decades with, as Justice Ginsburg
notes, ante, at 7-8, the approval of this Court as well as the Department of Justice. * * * *
Accordingly, I respectfully dissent.
-------------[END OF BROGAN CASE]-------------For review, focus on Justice Stevens dissenting analysis that a mere textual fit does not in
this case justify overturning a well-settled interpretation of that statute recognizing the exculpatory
no doctrine. Justice Stevens may be painting with too broad a brush in saying that the issue was
well-settled in the courts of appeals, for some courts had already started to turn away from it.
Nevertheless, if that were true, why could not the taxpayer in Brogan have argued the
James/Critzer/Garber line of reasoning that, even if the Supreme Court wanted to change the rules
with a new interpretation of the statute, it should do so in a criminal context only prospectively? Of
course a party charged with an exculpatory no cannot reasonably argue (at least in most cases) that
he or she was aware of the well-settled interpretation permitting an exculpatory no, but the
taxpayers in those cases also did not know the fine point of law and their knowledge was deemed
irrelevant to the issue of whether they could fairly be prosecuted for violating a legal standard that,
at the time of the conduct, was uncertain.
i.
DOJ Tax Policies.
The CTM provides:

Before a Section 1001 charge may be included in a criminal tax indictment, authority
must be obtained from the Deputy Assistant Attorney General (Criminal), Tax
Division. See Tax Division Directive No. 115, supra. The Tax Division prefers to
restrict authorization of Section 1001 prosecutions to those instances in which the
false statement was made under oath or in writing, although each request will be
considered on its merits.452
And, although not stated as a policy, the CTM further says:
In the criminal tax context, the statute is normally used in connection with false
documents or statements submitted to an Internal Revenue agent during the course
of an audit or investigation. Section 1001 is generally not used in the case of a false
statement on a return because, if the return is signed under the penalties of perjury,
as most are, Section 7206(1) of the Internal Revenue Code is considered a more
appropriate charge.453
452
453
CTM 24.02 (2008 ed.).

CTM 24.03 (2008 ed.) (citation omitted).
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j.
Additional Notes on 18 U.S.C 1001.
The astute student will have noticed that there is a good deal of overlap in the various
criminal provisions. False statements made during the course of a civil audit might subject the
taxpayer to prosecution under 7212 and 18 U.S.C. 1001. A false statement may be itself an
affirmative act in the evasion, 7201, or an overt act in a conspiracy. In addition, as we learned
earlier (see Beacon Brass, p. 38), false statements can refresh the criminal statute of limitations for
an underlying tax crime.
F.
Mail Fraud and Wire Fraud.

1.
The Statutes.
Sec. 1341. Frauds and swindles

Whoever, having devised or intending to devise any scheme or artifice to
defraud, or for obtaining money or property by means of false or fraudulent
pretenses, representations, or promises, or to sell, dispose of, loan, exchange, alter,
give away, distribute, supply, or furnish or procure for unlawful use any counterfeit
or spurious coin, obligation, security, or other article, or anything represented to be
or intimated or held out to be such counterfeit or spurious article, for the purpose of
executing such scheme or artifice or attempting so to do, places in any post office or
authorized depository for mail matter, any matter or thing whatever to be sent or
delivered by the Postal Service, or deposits or causes to be deposited any matter or
thing whatever to be sent or delivered by any private or commercial interstate carrier,
or takes or receives therefrom, any such matter or thing, or knowingly causes to be
delivered by mail or such carrier according to the direction thereon, or at the place
at which it is directed to be delivered by the person to whom it is addressed, any such
matter or thing, shall be fined under this title or imprisoned not more than 20
years,454 or both. If the violation affects a financial institution, such person shall be
fined not more than $1,000,000 or imprisoned not more than 30 years, or both.
Sec. 1343. Fraud by wire, radio, or television.
Whoever, having devised or intending to devise any scheme or artifice to
defraud, or for obtaining money or property by means of false or fraudulent
pretenses, representations, or promises, transmits or causes to be transmitted by
means of wire, radio, or television communication in interstate or foreign commerce,
any writings, signs, signals, pictures, or sounds for the purpose of executing such
scheme or artifice, shall be fined under this title or imprisoned not more than 20
years,455 or both. If the violation affects a financial institution, such person shall be
fined not more than $1,000,000 or imprisoned not more than 30 years, or both.
454
The White-Collar Crime Penalty Enhancement Act of 2002 (also Referred to as

Sarbanes-Oxley), P.L. 107204, substituted 20 years for five years.
455
See the preceding footnote.
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The Sarbanes-Oxley Act of 2002 (P.L. No. 107-204, 116 Stat. 745, section 902) added the
following related crime:
Sec. 1349. Attempt and Conspiracy.
Any person who attempts or conspires to commit any offense under this chapter shall
be subject to the same penalties as those prescribed for the offense, the commission
of which was the object of the attempt or conspiracy.
Thus, a person attempting or conspiring to commit mail or wire fraud is subject to the same penalties
as if they completed the underlying criminal conduct. Note in this regard that the provision
criminalizes the conduct of conspiring. It is not clear from the statute that the language used will
be construed to have an overt act requirement as the general conspiracy statute does.
2.
The Elements.
a.
Mail Fraud.
The Fifth Circuit Pattern Jury Instruction (2.60) provides:

use the United States mails in carrying out a scheme to defraud.
First: That the defendant knowingly created a scheme to defraud, that is
_______ [describe scheme from the indictment];
Second: That the defendant acted with a specific intent to commit fraud; and
Third: That the defendant mailed something [caused another person to mail
something] through the United States Postal Service for the purpose of carrying out
the scheme.
A scheme to defraud includes any scheme to deprive another of money,
property, or of the intangible right to honest services by means of false or fraudulent
pretenses, representations, or promises.
A representation may be false when it constitutes a half truth, or effectively
conceals a material fact, provided it is made with intent to defraud.
It is not necessary that the government prove all of the details alleged in the
indictment concerning the precise nature and purpose of the scheme, or that the
material mailed was itself false or fraudulent, or that the alleged scheme actually
succeeded in defrauding anyone, or that the use of the mail was intended as the
specific or exclusive means of accomplishing the alleged fraud.
What must be proved beyond a reasonable doubt is that the defendant
knowingly devised or intended to devise a scheme to defraud that was substantially
the same as the one alleged in the indictment; and that the use of the United States
mails was closely related to the scheme, in that the defendant either mailed
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something or caused it to be mailed in an attempt to execute or carry out the scheme.

To cause the mails to be used is to do an act with knowledge that the use of the
mails will follow in the ordinary course of business or where such use can reasonably
be foreseen even though the defendant did not intend or request the mails to be used.
Each separate use of the mails in furtherance of a scheme to defraud
constitutes a separate offense.
b.
Wire Fraud.
The Fifth Circuit Pattern Jury Instruction (2.61) provides:

use interstate wire communications facilities in carrying out a scheme to defraud.
First: That the defendant knowingly created a scheme to defraud, that is
_______ [describe scheme from the indictment];
Second: That the defendant acted with a specific intent to commit
fraud; and
Third: That the defendant used interstate wire communications facilities
[caused another person to use interstate wire communications facilities] for the
purpose of carrying out the scheme.
A scheme to defraud includes any scheme to deprive another of money,
property, or of the intangible right to honest services by means of false or fraudulent
pretenses, representations, or promises.
A representation may be false when it constitutes a half truth, or effectively
conceals a material fact, provided it is made with intent to defraud.
It is not necessary that the government prove all of the details alleged in the
indictment concerning the precise nature and purpose of the scheme, or that the
material transmitted by wire was itself false or fraudulent, or that the alleged scheme
actually succeeded in defrauding anyone, or that the use of interstate wire
communications facilities was intended as the specific or exclusive means of
accomplishing the alleged fraud.
What must be proved beyond a reasonable doubt is that the defendant
knowingly devised or intended to devise a scheme to defraud that was substantially
the same as the one alleged in the indictment; and that the use of the interstate wire
communications facilities was closely related to the scheme because the defendant
either wired something or caused it to be wired in interstate commerce in an attempt
to execute or carry out the scheme. To cause interstate wire communications
facilities to be used is to do an act with knowledge that the use of the wire facilities
will follow in the ordinary course of business or where such use can reasonably be
foreseen.
Each separate use of the interstate wire communications facilities in
furtherance of a scheme to defraud constitutes a separate offense.
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3.
Materials.
a.
Introduction.
The following quotes gives you a good flavor for the potential sweep of these statutes and
why mail and wire fraud are so malleable in the prosecutors hands:
To federal prosecutors of white collar crime, the mail fraud statute is our
Stradivarius, our Colt 45, our Louisville Slugger, our Cuisinart and our true love.
We may flirt with RICO, show off with 10b-5, and call the conspiracy law darling,
but we always come home to the virtues of 18 U.S.C. 1341, with its simplicity,
adaptability, and comfortable familiarity. It understands us and, like many a foolish
spouse, we like to think we understand it. 456
Federal prosecutors have long followed the maxim, When in doubt, charge mail
fraud.457
b.
Fraud is Fraud: The Pendulum Swings.
For many years, some courts were inclined to give a broad reading to the statutory language
scheme or artifice to defraud, or for obtaining money or property. The Fifth Circuit, for example,
said that the statute punished any conduct which fails to match the reflection of moral uprightness,
of fundamental honesty, fair play and right dealing in the general and business life of members of
society.458 Such broad statements were not limited to common law definitions of fraud.459 The
expansive interpretation has been summarized as follows:
In the 1980s, as Sections 1341 and 1343 swept more and more conduct within
their reach, some panels and individual judges warned that the expansion had gone
too far. In an opinion by Judge Richard Posner, a Seventh Circuit panel criticized the
moral-uprightness/fundamental-honesty/fair-play/right-dealing formulation as much
too broad. Judge Ralph Winter of the Second Circuit protested that the courts had
brought about the extension of mail fraud by judicial fiat, and had left juries free
to apply a legal standard which amounts to little more than the rhetoric of sixth grade
civics classes. And in 1985, four Supreme Court Justices declared that the lower
456
Jed S. Rakoff, The Federal Mail Fraud Statute (Part I), 18 DUQ. L. REV. 771, 771
(1980) (footnotes omitted).
457
Paul Mogin, Reining in the Mail Fraud Statute, 26 Champion 12 (2002), quoting John
C. Coffee & Charles V. Whitehead, The Federalization of Fraud: Mail and Wire Fraud Statutes, in
White Collar Crime: Business and Regulatory Offenses, 9.01, at 9-2 (O. Obermaler & R. Morvillo
eds., 1990).
458
United States v. Curry, 681 F.2d 406, 410 (5th Cir. 1982) (internal quotes omitted,
quoting Blachly v. United States, 380 F.2d 665, 671 (5th Cir. 1967)).
459
Paul Mogin, Reining in the Mail Fraud Statute, 26 Champion 12, 13 (2002).
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courts had permitted 'an extraordinary expansion' of Sections 1341 and 1343 'to
permit federal prosecution for conduct that some had thought was subject only to
state criminal and civil law.'460
In Neder v. United States, 527 U.S. 1 (1999), the Supreme Court held that materiality is an
element of these crimes. I discuss materiality immediately below, but for present purposes the Court
retreated from an expansive definition of fraud and anchored its analysis on the common law
meaning of fraud which included a materiality requirement.461 Commentators conclude that the
Courts reasoning in reaching the result on materiality should curb the more expansive definitions
of fraud.462 Furthermore, prior law cases suggesting that mere nondisclosure (rather than affirmative
misrepresentation) might violate the statute are now suspect.463
c.
Materiality.
In Neder v. United States, supra, the Supreme Court held that, although the respective
statutes did not state specifically that materiality is an element of the crime, materiality of falsehood
is an element of the federal mail fraud, wire fraud, and bank fraud statutes. The Court held that,
therefore, under Gaudin, the element must be submitted to the jury via the charge. You will recall
that, in Neder, the Court held that materiality in a 7206(1) count was an element but, where not
submitted to the jury, the court could apply a harmless error analysis. On the mail fraud count,
however, the lower courts had not made the harmless error analysis, so this issue was remanded for
them to do so.
The importation of a materiality requirement is broader than the mail fraud and wire fraud
statutes. Neither of those statutes contain an explicit materiality requirement. In Neder, the Court
held that the materiality element was implied in the use of the word fraud, a common law concept
used by Congress in defining the crimes. The Court reasoned that the common law could not have
conceived of fraud without proof of materiality; hence, the crime defined using the common law
word fraud implies the requirement of materiality. So, wherever the text of a criminal statute
does not have an explicit requirement of materiality, one may be imported from an external referrant
such as, most importantly, the common law. By contrast, if the criminal statute does not have such
an internal explicit requirement or an external referrant from which the requirement will be inferred,
the crime will not require materiality.464
460
Paul Mogin, supra, p. 16 (footnotes omitted).

Neder at p. 24.
462
E.g., Paul Mogin, supra, p. 16.
463
Id., p. 17.
464
E.g., United States v. Wells, 519 U.S. 482, 491 (1997) (holding that the crime of false
statement in 18 U.S.C. 1014 does not include a materiality requirement because the text does not
require it, the legislative history does not support it and there is no external referrant in the common
law to imply that Congress intended a materiality requirement); ; and Neder v. United States, 527
U.S. 1, 23 n. 7 (1999) (citing Wells).
461
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d.
Use of the Wires Element.
Use of the mail or wires is required for the crime. Is there some element of materiality as
to use i.e., does there have to be some material relationship between use of the mail or the wires
and the intent to defraud?
The mail- and wire-fraud statutes are not intended to reach all frauds but only those
in which a mailing or use of an interstate wire is part of the scheme. Schmuck v.
United States, 489 U.S. 705, 710 (1989). The use of the mail or wire need not be an
indispensable part of the fraud to satisfy the in furtherance of element of the
offense; it need only be incident to an essential part of the scheme . . . or a step in
[the] plot. Id. at 710-11. In other words, the success of the scheme must in some
measure depend on the mailing [or wire transmission]. The defendant himself need
not personally cause the mailing or use of the wire; it is enough that the use of mail
or wire will follow in the ordinary course of business, or where such use can
reasonably be foreseen, even though not actually intended. Pereira v. United States,
347 U.S. 1, 8-9 (1954) (Where one does an act with knowledge that the use of the
mails will follow in the ordinary course of business, or where such use can
reasonably be foreseen, even though not actually intended, then he 'causes' the mails
to be used.). The mailing or use of the wires need not itself contain false or
fraudulent material; a routine or innocent mailing or use of the wire can supply this
element of the offense, as long as the use of the mail or wire is part of the execution
of the scheme. Schmuck, 489 U.S. at 714-15.465
e.
Overlap with More Specific Criminal Provisions.
We have already seen that an act criminalized specifically by a particular statute may often
violate other more general or even more specific statutes. The question this raises is whether the
more particular criminal sanction should be applied exclusively or whether it is prosecutors option
or whether the prosecutor could even charge two or more crimes. We will consider facets of this
question below when discussing the lesser included offense concept.
In the specific mail fraud context, I hope you readily see that the crimes covered by 7201
and 7206(1) (to mention just the more prominent tax crimes) could also involve mail fraud or wire
fraud, since virtually all tax returns are mailed to the IRS or filed electronically and usually there
is some other mail or wire nexus to the implementation of the crime.466 Is mail or wire fraud
therefore another count that the Government can substitute for charges of tax evasion or tax perjury
465
United States v. Turner, 551 F.3d 657 (7th Cir. 2008) (some citations or portions of
citations, some explanatory material, and some quotations omitted for easier readability).
466
The cases support mail fraud charges for tax fraud. See United States v. Dale, 991
F.2d 819, 849 (D.C. Cir. 1993) (per curiam) (adopting the consistent holding of other courts that
wire fraud can be charged for tax crimes, reasoning that the tax code is not the exclusive regime
under which tax fraud schemes can be prosecuted; United States v. Bucey, 876 F.2d 1297, 1310 (7th
Cir. 1989); cf . Pasquantino v. United States, 544 U.S. 349 (2005).
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or some other tax specific crime or, worse still, can it pile those charges on? To illustrate, the
taxpayer files a fraudulent return by mail for year 1. The Government can charge either evasion (
7201) or mail fraud, both have roughly the same elements for conviction,467 have the same sentence
(5 years) and should produce the same sentence. But, in this simple illustration, in the real world,
characterizing the same conduct as mail fraud rather than tax fraud can ramp up the ante because
mail fraud, unlike tax fraud, is a predicate act for money laundering or RICO, both of which carry
significantly greater sentences than 5 years for tax fraud. The question here is whether, in a simple
tax evasion case whereby the means attempted was a fraudulent return filed by mail, should mail
fraud be a choice that the prosecutor can make and, if so, what are the guidelines that the prosecutor
should or must consider in making the charging choice? Although this is a simplified example, the
broader issue is presented in a number of more complex cases; the issue is whether, given the fact
that Congress has designated a tax crimes path and penalties, the prosecutor can use the ubiquitous
other tools in this case, mail fraud to punish what is, at core, a tax crime?
DOJ Tax has policies to deal with this overlap. Previously, DOJ Tax had a policy to give
primacy to the imperatives of targeted crimes for the tax system rather than more general crimes,
and thus generally disapproved the charging of more general crimes when the tax crimes seemed
more appropriate. DOJ Tax, however, recently superseded this policy directive with a new directive,
No. 128.468 That directive provides (footnotes omitted).
CHARGING MAIL FRAUD, WIRE FRAUD OR BANK FRAUD ALONE OR AS
PREDICATE OFFENSES IN CASES INVOLVING TAX ADMINISTRATION
Tax Division approval is required for any criminal charge if the conduct at
issue arises under the internal revenue laws, regardless of the criminal statute(s) used
to charge the defendant. Tax Division authorization is required before charging mail
fraud, wire fraud or bank fraud alone or as the predicate to a RICO or money
laundering charge for any conduct arising under the internal revenue laws, including
any charge based on the submission of a document or information to the IRS. Tax
Division approval also is required for any charge based on a state lax violation if the
case involves parallel federal tax violations.
The Tax Division may approve mail fraud, wire fraud or bank fraud charges
in tax-related cases involving schemes to defraud the government or other persons
if there was a large fraud loss or a substantial pattern of conduct and there is a
significant benefit to bringing the charges instead of or in addition to Title 26
violations. See generally United States Attorneys' Manual (U.S.A.M.) $9-43.100.
Absent unusual circumstances, however, the Tax Division will not approve mail or
467
The textual elements do not overlap significantly, but in a practical sense I think they
do. I do note, however, that others perceive the mail fraud charge as being easier to prove. See
Donald Crump, Criminals Don't Pay: Using Tax Fraud to Prohibit Organized Crime, 9 Hous. Bus.
& Tax L.J. 386, 399 (2009) (although noting that all observers are not of one mind about this.)
468
CTM 2.00 (2008 ed.)
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wire fraud charges in cases involving only one person's tax liability, or when all
submissions to the IRS were truthful.
Fraud charges should be considered if there is a significant benefit at the
charging stage (e.g,, supporting forfeiture of the proceeds of a fraud scheme;
allowing the government to describe the entire scheme in the indictment); at trial
(e.g., ensuring that the court will admit relevant evidence of the scheme; permitting
flexibility in choosing witnesses); or at sentencing (e.g., ensuring that the court can
order full restitution). See id 9-27 320(B)(3) (If the evidence is available, it is
proper to consider the tactical advantages of bringing certain charges.).
For example, mail fraud (18 U.S.C. 1341) or wire fraud (18 U.S.C. 1343)
charges may be appropriate if the target filed multiple fraudulent returns seeking tax
refunds using fictitious names, or using the names of real taxpayers without their
knowledge. Fraud charges also may be considered if the target promoted a fraudulent
tax scheme.
Bank fraud charges (18 U.S.C. $1344) can be appropriate in the case of a tax
fraud scheme that victimized a financial institution. Example: the defendant filed
false claims for tax refund and induced a financial institution to approve refund
anticipation loans on the basis of the fraudulent information submitted to the IRS.
Racketeering and Money Laundering Charges Based on Tax Offenses
The Tax Division will not authorize the use of mail, wire or bank fraud
charges to convert routine tax prosecutions into RICO or money laundering cases.
The Tax Division will authorize prosecution of tax-related RICO and money
laundering offenses, however, when unusual circumstances warrant it.
A United States Attorney who wishes to charge a RICO violation (18 U.S.C.
1962) in any criminal matter arising under the internal revenue laws, including a
predicate act based on a state tax violation, in the case of a parallel federal tax
violation- must obtain the authorization of the Tax Division and the Criminal
Division's Organized Crime and Racketeering Section. U.S.A.M. 9-1 10.101.
A United States Attorney who wishes to bring a money laundering charge (18
U.S.C. 1956) based on conduct arising under the internal revenue laws must obtain
the authorization of the Tax Division and, if necessary, the Criminal Division's Asset
Forfeiture and Money Laundering Section. U.S.A.M. 9-105.300.
Practitioners have expressed concern that this new directive signals more aggressive use of the mail
and wire fraud statutes for tax crimes such as tax crimes. Among the concerns are:
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The practical effect of such additional charges could be significant in cases

where the tax involved is very, very large (so that stacking is needed to reach
the sentence that would be imposed by the Sentencing Guidelines).
An even more dramatic effect on sentencing is achieved if the mail or wire

fraud is used as a linchpin for a money laundering charge carrying a much
longer sentence that could otherwise not be imposed if only one or more tax
crimes were charged.
I discuss money laundering and sentencing below, so that you can better assess this concern. At this
point, simply keep open the possibility that the new directive may make these concerns legitimate
concerns.
f.
Commercial Delivery Services Included.
In a tilt to the modern world as we know it, the statute now includes fraud effected by
commercial delivery services469 which, of course, have the required nexus to interstate commerce
and thus within the federal governments power to legislate.470
g.
Pasquantino.
Pasquantino v. United States, 544 U.S. 349 (2004), reh. den. 544 U.S. 1012 (2005)
OPINION: JUSTICE THOMAS delivered the opinion of the Court.
At common law, the revenue rule generally barred courts from enforcing the
tax laws of foreign sovereigns. The question presented in this case is whether a plot
to defraud a foreign government of tax revenue violates the federal wire fraud
statute, 18 U.S.C. 1343 (2000 ed., Supp. II). Because the plain terms of 1343
criminalize such a scheme, and because this construction of the wire fraud statute
does not derogate from the common-law revenue rule, we hold that it does.
I
Petitioners Carl J. Pasquantino, David B. Pasquantino, and Arthur Hilts
were indicted for and convicted of federal wire fraud for carrying out a scheme to
smuggle large quantities of liquor into Canada from the United States. According to
the evidence presented at trial, the Pasquantinos, while in New York, ordered liquor
over the telephone from discount package stores in Maryland. See 336 F.3d 321, 325
(CA4 2003) (en banc). They employed Hilts and others to drive the liquor over the
469
1341.
The nexus is there even if the specific item does not in fact cross a state line. United
States v. Photogrammetric Data Services., Inc., 259 F.3d 229 (4th Cir. 2001) cert. denied, 535 U.S.
926 (2002).
470
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Canadian border, without paying the required excise taxes. Ibid. The drivers avoided
paying taxes by hiding the liquor in their vehicles and failing to declare the goods to
Canadian customs officials. Id., at 333. During the time of petitioners' smuggling
operation, between 1996 and 2000, Canada heavily taxed the importation of
alcoholic beverages. See 1997 S. C., ch. [*11] 36, 21.1(1), 21.2(1); Excise Act
Schedule 1.(1), R. S. C., ch. E-14 (1985); Excise Act 2001, Schedule 4, ch. 22, 2002
S. C. 239. Uncontested evidence at trial showed that Canadian taxes then due on
alcohol purchased in the United States and transported to Canada were
approximately double the liquor's purchase price. App. 65-66.
Before trial, petitioners moved to dismiss the indictment on the ground that
it stated no wire fraud offense. The wire fraud statute prohibits the use of interstate
wires to effect any scheme or artifice to defraud, or for obtaining money or property
by means of false or fraudulent pretenses, representations, or promises. 18 U.S.C.
1343 (2000 ed., Supp. II). Petitioners contended that the Government lacked a
sufficient interest in enforcing the revenue laws of Canada, and therefore that they
had not committed wire fraud. App. 48-57. The District Court denied the motion and
the case went to trial. The jury convicted petitioners of wire fraud.
Petitioners appealed their convictions to the United States Court of Appeals
for the Fourth Circuit, again urging that the indictment failed to state a wire fraud
offense. They argued that their prosecution contravened the common-law revenue
rule, because it required the court to take cognizance of the revenue laws of Canada.
Over Judge Hamilton's dissent, the panel agreed and reversed the convictions. 305
F.3d 291, 295 (2002). Petitioners also argued that Canada's right to collect taxes from
them was not money or property within the meaning of the wire fraud statute, but
the panel unanimously rejected that argument. Id., at 294-295; id., at 299 (Hamilton,
J., dissenting).
The Court of Appeals granted rehearing en banc, vacated the panel's decision,
and affirmed petitioners' convictions. 336 F.3d 321 (CA4 2003). It concluded that
the common-law revenue rule, rather than barring any recognition of foreign revenue
law, simply allowed courts to refuse to enforce the tax judgments of foreign nations,
and therefore did not preclude the Government from prosecuting petitioners. Id., at
327-329. The Court of Appeals held as well that Canada's right to receive tax
revenue was money or property within the meaning of the wire fraud statute. Id.,
at 331-332.
We granted certiorari to resolve a conflict in the Courts of Appeals over
whether a scheme to defraud a foreign government of tax revenue violates the wire
fraud statute. 541 U.S. 972 (2004). Compare United States v. Boots, 80 F.3d 580,
587 (CA1 1996) (holding that a scheme to defraud a foreign nation of tax revenue
does not violate the wire fraud statute), with United States v. Trapilo, 130 F.3d 547,
552-553 (CA2 1997) (holding that a scheme to defraud a foreign nation of tax
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revenue violates the wire fraud statute). We agree with the Court of Appeals that it
does and therefore affirm the judgment below. n1 471
II
We first consider whether petitioners' conduct falls within the literal terms
of the wire fraud statute. The statute prohibits using interstate wires to effect any
scheme or artifice to defraud, or for obtaining money or property by means of false
or fraudulent pretenses, representations, or promises. 18 U.S.C. 1343 (2000 ed.,
Supp. II). Two elements of this crime, and the only two that petitioners dispute here,
are that the defendant engage in a scheme or artifice to defraud, ibid., and that the
object of the fraud . . . be '[money or] property' in the victim's hands, Cleveland v.
United States, 531 U.S. 12, 26 (2000). Petitioners' smuggling operation satisfies both
elements.
Taking the latter element first, Canada's right to uncollected excise taxes on
the liquor petitioners imported into Canada is property in its hands. This right is
an entitlement to collect money from petitioners, the possession of which is
something of value to the Government of Canada. McNally v. United States, 483
U.S. 350, 358 (1987) (internal quotation marks omitted). Valuable entitlements like
these are property as that term ordinarily is employed. See Leocal v. Ashcroft, 543
U.S. 1, 9 (2004) (When interpreting a statute, we must give words their ordinary or
natural meaning (internal quotation marks omitted)); Black's Law Dictionary 1382
(4th ed. 1951) (defining property as extending to every species of valuable right
and interest). Had petitioners complied with this legal obligation, they would have
paid money to Canada. Petitioners' tax evasion deprived Canada of that money,
inflicting an economic injury no less than had they embezzled funds from the
Canadian treasury. The object of petitioners' scheme was to deprive Canada of
money legally due, and their scheme thereby had as its object the deprivation of
Canada's property.
The common law of fraud confirms this characterization of Canada's right to
excise taxes. The right to be paid money has long been thought to be a species of
property. See 3 W. Blackstone, Commentaries on the Laws of England 153-155
(1768) (classifying a right to sue on a debt as personal property); 2 J. Kent,
Commentaries on American Law *351 (same). Consistent with that understanding,
fraud at common law included a scheme to deprive a victim of his entitlement to
471
Fn. 1 of opinion: n1 We express no view on the related question whether a foreign

government, based on wire or mail fraud predicate offenses, may bring a civil action under the
Racketeer Influenced and Corrupt Organizations Act for a scheme to defraud it of taxes. See
Attorney General of Canada v. R. J. Reynolds Tobacco Holdings, Inc., 268 F.3d 103, 106 (CA2
2001) (holding that the Government of Canada cannot bring a civil RICO suit to recover for a
scheme to defraud it of taxes); Republic of Honduras v. Philip Morris Cos., 341 F.3d 1253, 1255
(CA11 2003) (same with respect to other foreign governments).
- 242 -
money. For instance, a debtor who concealed his assets when settling debts with his
creditors thereby committed common-law fraud. 1 J. Story, Equity Jurisprudence
378 (I. Redfield 10th rev. ed. 1870); Chesterfield v. Janssen, 28 Eng. Rep. 82, 2 Ves.
Sen. 125 (ch. 1750); 1 S. Rapalje & R. Lawrence, A Dictionary of American and
English Law 546 (1883). That made sense given the economic equivalence between
money in hand and money legally due. The fact that the victim of the fraud happens
to be the Government, rather than a private party, does not lessen the injury.
Our conclusion that the right to tax revenue is property in Canada's hands,
contrary to petitioners' contentions, is consistent with Cleveland, supra. In that case,
the defendant, Cleveland, had obtained a video poker license by making false
statements on his license application. Id., at 16-17. We held that a State's interest in
an unissued video poker license was not property, because the interest in choosing
particular licensees was purely regulatory and [could not] be economic. Id., at
22-23. We also noted that the Government nowhere alleged that Cleveland
defrauded the State of any money to which the State was entitled by law. Ibid.
Cleveland is different from this case. Unlike a State's interest in allocating a
video poker license to particular applicants, Canada's entitlement to tax revenue is
a straightforward economic interest. There was no suggestion in Cleveland that the
defendant aimed at depriving the State of any money due under the license; quite the
opposite, there was no dispute that [the defendant's partnership] paid the State of
Louisiana its proper share of revenue due. Id., at 22. Here, by contrast, the
Government alleged and proved that petitioners' scheme aimed at depriving Canada
of money to which it was entitled by law. Canada could hardly have a more
economic interest than in the receipt of tax revenue. Cleveland is therefore
consistent with our conclusion that Canada's entitlement is property as that word
is used in the wire fraud statute.
Turning to the second element at issue here, petitioners' plot was a scheme
or artifice to defraud Canada of its valuable entitlement to tax revenue. The
evidence showed that petitioners routinely concealed imported liquor from Canadian
officials and failed to declare those goods on customs forms. See 336 F.3d at 333.
By this conduct, they represented to Canadian customs officials that their drivers had
no goods to declare. This, then, was a scheme designed to defraud by
representations, Durland v. United States, 161 U.S. 306, 313 (1896), and therefore
a scheme or artifice to defraud Canada of taxes due on the smuggled goods.
Neither the anti-smuggling statute, 18 U.S.C. 546, nor U.S. tax treaties, see
Attorney General of Canada v. R. J. Reynolds Tobacco Holdings, Inc., 268 F.3d 103,
115-119 (CA2 2001), convince us that petitioners' scheme falls outside the terms of
the wire fraud statute. n4472 Unlike the treaties and the anti-smuggling statute, the
472
Fn. 4 of opinion: n4 Any overlap between the anti-smuggling statute and the wire
fraud statute is beside the point. The Federal Criminal Code is replete with provisions that
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wire fraud statute punishes fraudulent use of domestic wires, whether or not such
conduct constitutes smuggling, occurs aboard a vessel, or evades foreign taxes. See
post, at 9, n. 9 (GINSBURG, J., dissenting) (noting that the anti-smuggling statute
does not apply to this prosecution). Petitioners would be equally liable if they had
used interstate wires to defraud Canada not of taxes due, but of money from the
Canadian treasury. The wire fraud statute applies without differentiation to these
two categories of fraud. Clark v. Martinez, 543 U.S. 371, 378 (2005). To give these
same words a different meaning for each category would be to invent a statute rather
than interpret one. Ibid. We therefore decline to interpret [this] criminal statute
more narrowly than it is written. Brogan v. United States, 522 U.S. 398, 406 (1998).
---------[End of Case Excerpt]-----------The foregoing part of the decision seems straightforward in its interpretation of the wire
fraud statute. After holding that the wire fraud statute covered the conduct in issue, the majority
opinion then rejects the argument that the revenue rule precluded the wire statute from reaching
the conduct in question. In dissent, Justice Ginsburg (joined by three other justices) objected that
the interpretation of the wire fraud statute by the 5 justice majority offended notions of
extraterritoriality, the common law revenue rule and the rule of lenity. All of these reasons related
to policies reflected in the revenue rule and do not address the scope of the application of the wire
fraud statute (i.e., it just addresses whether the wire fraud statute should be interpreted to exclude
matters facially covered by the sweep of the statutory language). I defer until later discussing the
revenue rule and its effect on tax crimes generally.
For present purposes, Justice Thomas summary application of the wire fraud statute in
Pasquantino should illustrate how pervasive the statute can be in its potential application. As the
world increasingly becomes a global village in which nations cooperate regarding tax matters, one
can expect such cases to continue. (See also the discussion elsewhere in these materials regarding
international investigations beginning on 248, below.)
G.
Obstruction of Justice (18 U.S.C. 1503, 1505, 1510, 1512, 1519).
Title 18 U.S.C. Chapter 73 defines various crimes under the general rubric of obstruction
of justice. We noted above that 18 U.S.C. 1503 criminalize obstruction of justice in a proceeding
and 18 U.S.C. 1505 criminalizes impeding or obstructing the administrative of agencies generally
that substantially parallels the specific crime in the Omnibus Clause of 7212. Similarly, 18 U.S.C.
1510 criminalizes obstructing a criminal investigation, which overlaps the Omnibus Clause. Other
conduct criminalized in 18 U.S.C. Chapter 73 overlaps criminal provisions. In tax administration
cases, barring some most unusual factor, the tax crime will be charged rather than the overlapping
Title 18 obstruction crime.
criminalize overlapping conduct. See Stuntz, The Pathological Politics of Criminal Law, 100 Mich.
L. Rev. 505, 518, and n. 62 (2002); United States v. Wells, 519 U.S. 482, 505-509, and nn. 8-10
(1997) (STEVENS, J., dissenting). The mere fact that two federal criminal statutes criminalize
similar conduct says little about the scope of either.
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The Sarbanes-Oxley Act of 2002 (P.L. No. 107-204, 116 Stat. 745, section 802) added the
following additional obstruction crime:
Sec. 1519. Destruction, alteration, or falsification of records in Federal investigations
and bankruptcy
Whoever knowingly alters, destroys, mutilates, conceals, covers up, falsifies, or
makes a false entry in any record, document, or tangible object with the intent to
impede, obstruct, or influence the investigation or proper administration of any
matter within the jurisdiction of any department or agency of the United States or
any case filed under title 11, or in relation to or contemplation of any such matter or
case, shall be fined under this title, imprisoned not more than 20 years, or both.
One recent development in the Governments war against corporate financial crimes (Enron
being the poster child) is the use of the Title 18 obstruction provision to cover conduct that was
historically not thought covered by that provision. Entities, principally corporations, whose
executives may have violated the law will often conduct internal investigations to determine whether
there has been misconduct. These internal investigations are often prompted by Government civil
or criminal investigations. The fruits of these investigations are often turned over to the Government
agencies investigating the matter. Government agencies may rely upon statements made to the
entitys internal investigator (usually a prestigious law firm), and thus false statements and other
obstructive conduct in the internal investigation can obstruct or impede the Government
investigation. On that basis, the Government has recently been charging obstruction for such
conduct in the investigation.473 Presumably, this line of analysis could apply to the Internal Revenue
Codes Omnibus Clause. Note that a lie told to the internal investigator could not support a 1001
charge, but apparently can support an obstruction charge.
III.
WAR ON CRIMES.
A.
Introduction.
Congress has enacted several crimes and related civil penalties directed to the financial
aspects of drug trafficking, organized crime and similar perceived blights on society. These are not
typically thought of as tax crimes. Some significant level of tax noncompliance often attends the
types of activity thus criminalized. That gives the tax system an interest in these crimes, for there
are major reasons to close all significant gaps in the tax system. However, the systemic tax interest
is small compared to the societal and political interest in fighting the crimes underlying these
particular crimes.
The tools necessary to discover, investigate and prosecute these types of crimes are financial
tools. The IRS has historically developed expertise in the types of investigative techniques that can
473
See Alex Berenson, Case Expands Type of Lies Prosecutors Will Pursue, New York
Times (5/17/04) (noting the bars concerns with this development because of the unique pressures
that corporate executives have in responding to internal investigations).
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be deployed effectively against these types of crimes. The IRS has thus, until recently, been a major
participant in the enforcement of these laws. The IRSs criminal enforcement resources have been
significantly devoted to these crimes, thus detracting from the IRSs past focus upon traditional tax
crimes so as to undergird the tax system.
Using IRS investigative resources to combat and investigate these non-tax financial crimes
is controversial. Opponents argue that deploying the IRSs limited resources to these crimes takes
away from the use of those resources in the historical role to support the overall tax system. When
IRS resources are significantly devoted to fighting drug trafficking and organized crime, one can
make a powerful argument that the benefit to the overall tax system is minimal or nonexistent. A
person involved in drug trafficking or organized crime is unlikely to be influenced to get right with
the tax system by these financial crimes and responsive enforcement initiatives by the IRS. Since
the crimes are not tax crimes at all and would be prosecutable even if the guilty parties fully paid
their taxes and properly reported all material facts on the appropriate returns, there is a disconnect
between the devotion of IRS resources to the task and the historical mission of the tax criminal
enforcement agencies.
This disconnect was a prominent issue in the Webster Report. The IRS has implemented or
is now in the process of implementing most of the Webster Report recommendations. Specifically,
for present purposes, it will devote more of its resources to traditional tax criminal enforcement.
Nevertheless, CI will continue to be involved at a significant level the War on Crimes.
Further, the underlying criminal conduct will continue regardless of how CI reorders its priorities.
Since tax crimes travel with these types of crimes, we will cover them very briefly here.
These laws place major impediments to the financial side of criminal activity. Since much
crime takes place in a cash economy, these crimes target the movement of actual cash or financial
instruments that are cash substitutes. We have seen one instance of that in 6050I.474 Another
example, to which we turn first, is the requirement in Title 31, Money and Finance, requiring
financial institutions to file currency transaction reports (CTRs). I then turn to the crimes
generically known as money laundering where financial transactions with the proceeds of unlawful
activity are targeted.
In this section, I introduce these requirements principally through text materials discussing
pertinent parts of the statutes. I will not set forth the statutes themselves separately, because the
statutes creating the crimes and dealing with facets of the crimes are quite lengthy and complex and
would, I fear, cause you to devote too many resources to this aspect of the materials. I cite the
statutory provisions, and you are certainly encouraged to read them if you desire.
474
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B.
Reporting Requirements and Avoidance.

1.
Introduction.
Seeking to discover the profit from illegal activity, and funds flows related thereto, Congress
has enacted a series of reporting and recordkeeping requirements. We have looked at one such
instance in the Internal Revenue Code, 6050I. We now take a brief look at other parts of the
tapestry of reporting requirements making it more difficult for criminals to deal effectively with their
ill-gotten gains. Unfortunately, as we will discover, these provisions apply to persons with legally
obtained cash as well as persons with illegally obtained cash.475 The saving grace, in most cases,
is prosecutorial discretion.
2.
Bank Secrecy Act and CTRs.
The Currency and Foreign Transaction Act,476 frequently referred to as the Bank Secrecy Act
of 1970 (BSA), authorizes Treasury to issue regulations requiring financial institutions and other
persons to keep records and file reports that are determined to have a high degree of usefulness in
criminal, tax, regulatory, intelligence, and counter-terrorism matters, and to implement
counter-money laundering programs and compliance procedures.477 The BSA was based on
Congress concern that financial institutions were used to launder proceeds of criminal activity and
of unreported income. Congress purpose was to identify cash movements for use in law
enforcement by creating a paper trail from financial institutions back to the criminal organization.
And, in a post-9/11 world, the reports required for financial institutions can be helpful in identifying
or tracking the flow of funds needed for substantial terrorist activities.
The BSA is quite complex and is generally beyond the scope of this book. Here, I just
summarize the provisions more relevant to tax crimes.478 In broad strokes, the regulations adopted
under BSAs authority require the following reports and recordkeeping:479
475
See e.g., the Bajakajian case discussed under forfeitures, p. 420, 422.
Titles 1 and II of Public Law 91-508, as amended, codified at 12 U.S.C. 1829b, 12
U.S.C. 1951-1959, and 31 U.S.C. 5311-5330.
477
31 U.S.C. 5311; United States v. Clines, , 958 F.2d 578, 583 (4th Cir. 1992), cert.
denied, 505 U.S. 1205 (1992).
478
For a discussion generally, see Matthew J. Shepherd, Scott N. Wagner and Natasha
M. Williams, Financial Institutions Fraud, 28 Am. Crim. L. Rev. 843, 871 (2001) and the various
Reports to Congress that I cite in this section of the text.
479
This list is from a Report by Treasury, Board of Governors of the Federal Reserve
System, the SEC to Congress in Accordance with Section 356(c) of the Uniting and Strengthening
America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001
(Usa Patriot Act) (12/31/02), reproduced at 2003 TNT 1-7 (1/2/03) (2001 BSA Report)
476
- 247 -
Keep records related to certain monetary instrument purchases and funds transfers;
Report currency transactions of more than $10,000 by, through, or to the financial
institution;
Report the transport of currency across U.S. borders;
Report certain accounts that United States citizens and residents hold at foreign
financial institutions; and
Report suspicious transactions relevant to possible violations of the law.
Financial institutions covered by the significant reporting provisions of the BSA include not
only banks and savings and loans, but broad categories of NonBank Financial Institutions which
include so-called money service businesses or acronymically MSBs480 securities and
commodity brokers, investment banking companies, currency exchanges, telegraph companies,
certain issuers of travelers checks and money orders, casinos, insurance companies, operators of
credit card systems, pawnbrokers, dealers in precious metals, travel agencies, real estate brokers,
plus such other businesses as covered in regulations issued by Treasury.481
The covered financial institutions are required to maintain certain records and file reports
on domestic and foreign transactions involving cash or monetary amounts of $10,000 or more. Of
course, merely transferring cash in excess of $10,000 does not mean that the person is going to
commit a crime or that the money is either the fruits of a crime or, less likely, an instrumentality of
a crime. But in our economy which otherwise relies on checks, credit cards and, with respect to
large fund transfers, wire transfers which create a paper (or digital, at least) trail, large flows of cash
funds are unusual and probably a high percentage of such cash fund transfers implicate the violation
of some law in some respect. Accordingly, the congressional judgment was that businesses
participating in the transfer be subject to reporting requirements. The Government can use the
reports to make its criminal enforcement efforts more efficient. Correspondingly, the existence of
the reporting requirement will make criminals' use of their ill-gotten gains less efficient.
The principal reporting requirement for present purposes is the Currency Transaction Report,
FinCEN Form 104 (formerly Form 4789) (CTR). CTRs are required for all cash transactions or
series of related transactions that exceed $10,000. Certain customers, where the likelihood of
ill-gotten gains is low, are exempted from the requirements. Transactions structured -- broken into
less than $10,000 components -- to evade the reporting requirements are criminalized.482 There are
thus two key elements to the integrity of the requirements. First, financial institutions must report.
Second, depositors and other persons dealing with financial institutions must not structure their
dealings so as to prevent financial institutions from complying.
480
The Governments Financial Crimes Enforcement Network (often short-handed to

FinCEN) maintains an MSB web site.
481
31 U.S.C. 5312(a)(2); see also 31 C.F.R. 103.11(n).
482
31 U.S.C. 5324.
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In Ratzlaf v. United States,483 the Supreme Court held that the willfulness element then in
the statute required that the Government prove not only that the defendant acted to evade the
reporting requirements but also acted with the knowledge that evading the reporting requirements
was illegal. Congress quickly changed the statute to impose criminal liability only upon a showing
that the defendant acted to evade the reporting requirement.484 Whether or not the defendant knew
that the structuring was illegal is now irrelevant.
Although there is no general duty under American law to report crimes, certain financial
institutions (including money services businesses and high cash businesses such as casinos) are
required to file with FinCen a report, called a Suspicious Activity Report (SAR, but not to be
confused with the Special Agents Report with the same acronym which we encountered earlier).485
This SAR combines features of earlier reports and is in addition to the CTR if required. The SAR
is required if the financial institution knows, suspects, or has reason to suspect the money was
derived from illegal activities or the transaction was part of a plan to violate federal laws and
financial reporting requirements (structuring).486 The financial institution is not required to
investigate or confirm that a crime has been committed. The financial institution is prohibited from
telling its customer of the filing of the report, even in response to a subpoena.487 The financial
institution is protected from liability to the customer.488 The IRS may share this SAR with the IRS
examination function having civil tax responsibility, but components of the IRS receiving the
information are required to keep the information secure to the same extent as if received from a
confidential informant.489
The criminal penalties for violating the reporting requirements are stiff five years and
$250,000.490 The penalties for structuring are equally stiff and parallel the reporting penalties five
years and fine under Title 18.491 As with the reporting penalty, the penalties are doubled if the
person structured while violating another law of the United States or as part of a pattern of any
illegal activity involving more than $100,000 in a 12-month period.492
483
510 U.S.135 (1994).

See 31 U.S.C. 5324(c) (eliminating the willfulness requirement).
485
31 U.S.C. 5318(g). The SAR requirement applies to banks and FDIC-insured
savings associations. There are various iterations of this form. For depository institutions, the form
is TD F 90-22.47. For other forms, see the FinCEN web site.
486
TIGTA Report 2010-30-104, Currency Report Data Can Be a Good Source for Audit
Leads (9/17/10); see generally 31 CFR Part 103.
487
31 U.S.C. 5281(g)(2).
488
31 U.S.C. 5318(g)(3).
489
See TIGTA Report 2002-10-150 (The Criminal Investigation Function Provides
Adequate Guidance to Field Offices for Money Laundering Investigations, 8/21/02) noting that,
prior to 2001, IRS CI did not share SAR information with the civil function within the IRS.
490
31 U.S.C. 5322(a).
491
31 U.S.C. 5324(c)(1).
492
31 U.S.C. 5322(b).
484
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Administration of the BSAs reporting requirements is with Treasurys Financial Crimes

Enforcement Network ( FinCEN) and the IRS, both of which play a significant role in many forms
of financial crime.493 However, FinCEN partners with many other federal regulatory agencies that
are the primary supervisors or functional regulators of financial institutions subject to the BSA.
These other agencies, through resources located both at headquarters and in field offices, are
essential to the effective and efficient administration of the BSA.494 For covered financial
institutions without a federal regulator, FinCEN and the IRS work cooperatively.
The IRS, through both its civil operating divisions and its criminal division, is the most
frequent user of the financial information produced by BSAs reporting requirements.495
3.
Other Reports.
a.
Other CTRs.
There are other currency transaction reporting requirements.496 We look at the Customs
requirement on transporting cash into or out of the country in discussing the Bajakajian case.497
493
2002 Treasury Report on Administration of BSA.

2002 Treasury Report on Administration of BSA.
495
2002 Treasury Report on Administration of BSA. This reports notes that the
principal use in terms of numbers is for civil purposes, but that, by way of example, in fye 1999, the
IRS CI initiated 102 criminal investigations of possible tax law violations with leads developed
solely from scrutiny and analysis of the reports filed under the BSA. Be careful here to distinguish
between and investigation and a prosecution. The information is often principally used to identify
and perhaps prosecute some violation other than a BSA violation.
496
Other currency transaction forms include: (1) Currency Transaction Report (CTR),
FinCEN Form 104 by financial institutions to report currency transactions exceeding $10,000; (2)
Report of International Transportation of Currency or Monetary Instruments (CMIR), FinCEN Form
105, for use by any person to report the transportation into or out of the United States of currency
and certain other monetary instruments on any one occasion in excess of $10,000; (3) Report of
Foreign Bank and Financial Accounts (FBAR), Form TD F 90-22.1, for use by any person to make
an annual report of a financial interest in a foreign account if the aggregated value of the foreign
financial account exceeds $10,000 at any time during the calendar year; (4) various iterations of
Suspicious Activity Report (SAR), including FinCEN Form 101, Suspicious Activity Report by the
Securities and Futures Industries and Form TD F 90-22.47, for use by depository institutions to
report suspicious financial transactions. Information on these and other reporting requirements and
forms and downloadable fill-in forms can be obtained from the FinCen web page.
497
See below at p. 420, 422.
494
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b.
FBARs.
The Bank Secrecy Act (BSA)498 and underlying regulations require a Report of Foreign
Bank and Financial Accounts (often referred to as FBAR, an acronym499 for the popular term for
this form, Foreign Bank Account Report)500 that must be filed by United States persons having a
financial or signatory interest in a foreign financial account.501 You may recall that Form 1040,
Schedule B (i) asks whether the taxpayer has foreign financial accounts exceeding $10,000 in
aggregate amount and, if so, which countries the accounts are in and (ii) advises that there is an
FBAR reporting requirement. Not only does a wrong answer on the question on the income tax
return (Form 1040) raise the specter of a tax perjury charge or even tax evasion if income is omitted
but failure to file the FBAR is an independent felony criminal act subject to the potentially harsher
civil penalties (which I discuss below). The requirement to file an FBAR is independent of the
requirement to answer the question on the tax return and to pay tax on income related to the foreign
financial account. The two are related, for a taxpayer having a reportable interest in a foreign bank
account who answers the question no is unlikely to report the income or file the FBAR; similarly
a taxpayer who fails to answer the question at all is unlikely to report the income or file the FBAR.502
A United States person is required to file an FBAR if all of the following are present: (i) at
any time during the calendar year, (ii) the person has a financial interest in, or signature
authority or other authority over (iii) one or more financial accounts in a foreign country (iv)
with an aggregate value exceeding $10,000. Financial interest and signature or other authority are
defined quite broadly in order to minimize technical avoidance of the duty to file.503 In its current
iteration, the FBAR requires the owner or person with signatory authority over the account to
identify himself, herself or the entity filing the FBAR, identify the account (bank, location and
account number), state the highest amount in the account during the year for which the report is
filed, and identify the account owner.504 A close reading of the FBAR instructions and common
sense are required to understand the quoted terminology.505
498
The BSA, otherwise known as the Currency and Foreign Transactions Reporting
Act, was enacted in 1970.
499
Actually a combination of an acronym and an initialism.
500
The report is Treasury Form TD F 99-22.1. The FBAR form was revised in 2008,
effective as of 2009.
501
31 U.S.C. 5314; 31 C.F.R. 103.24.
502
The Schedule B instructions generally do not require the Schedule B if taxable
interest or ordinary dividends do not exceed $1,500, but the Schedule B is required in all events if
You had an interest in, or signature authority over, a financial account in a foreign country.
503
See the FBAR form instructions. See also United States v. Clines, 958 F.2d 578, 583
(4th Cir. 1992), cert. denied, 505 U.S. 1205 (1992) (involving an earlier version of the FBAR form).
504
The current form was revised as of January 2012. The form has seen several
iterations in recent years and will likely see further iterations in the reasonably near future as the IRS
continues to refine its focus on the issues presented by foreign financial accounts.
505
For example, a financial account includes the usual suspects (bank and brokerage
accounts), but also includes other financial account[s]. Id. Courts are likely to read this
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The FBAR is an information return or report that is filed with the IRS Detroit Computing
Center (DCC). Upon receipt, the information from the FBAR is input into the BSA financial
database, which is jointly administered by DCC and FinCEN. Once FBARs are posted to the BSA
financial database, the information is available to FinCEN analysts, law enforcement (including the
IRS), and appropriate regulatory authorities for use, among other things, in tracking flows of money.
The FBAR is not subject to 6103's privacy requirements and thus may be freely shared with law
enforcement agencies. The IRS has principal responsibility to enforce the FBAR requirements.506
The IRS may refer violations of the FBAR reporting requirements to the DOJ with a
recommendation for criminal prosecution or civil suits to assert the FBAR civil penalties. Since the
FBAR requirements are not part of the Internal Revenue Code, the procedural safeguards applicable
in civil tax contexts may not apply, but the IRS may voluntarily apply some of them (such as the
internal Appeals Office review process).507
The criminal penalty for willful failure to file or filing a false FBAR is 5 years incarceration
or $250,000 fine or both.508 If the proscribed conduct occurs while violating another law of the
expansively to include accounts that can function like such accounts. In United States v. Clines, 958
F.2d 578 (4th Cir. 1992), cert. den. 505 U.S. 1205 (1992), the court held that a profit share capital
account maintained on a ledger of a foreign corporation that permitted the defendant to withdraw
funds met the definition.
506
The authority to enforce the provisions of 31 U.S.C. 5314 and sections 103.24 and
103.32 has been re-delegated from FinCEN to the Commissioner of Internal Revenue by means of
a Memorandum of Agreement between FinCEN and the IRS dated April 2, 2003. 31 CFR
103.56(g); IRM 8.11.6.1 (11-01-2011) FBAR Overview, par. 1. The sweep of the authority is
quite broad indeed, covering the following authorities (i) to enforce the FBAR provisions of the
BSA and its implementing regulations, (ii) to investigate possible violations, and assess and collect
civil penalties in connection therewith (iii) to respond to public inquiries and requests for advice;
(iv) to issue administrative rulings; (v) to provide related assistance to the public with respect to
compliance with FBAR requirements; (vi) to revise the FBAR form and instructions, and (vii) to
propose to FinCEN revisions of the applicable regulations for the purpose of enhancing FBAR
compliance and enforcement.
507
But, for example, the IRS will not apply the Code requirement of 7491(c) that the
IRS bear a burden of production with respect to penalties. That may not be an important matter
because, as I note later, the IRS probably has an affirmative burden of persuasion at least with
respect to the most draconian FBAR penalty, that parallels the enhanced burden the IRS has to prove
civil fraud. I suspect that, for the lesser FBAR penalties (the nonwillful penalties), the IRS may
have the standard civil proof burden more likely than not. It is not clear that the nonwillful
FBAR penalty is subject to the presumption of correctness or any other similar consideration that
some courts purport to use to force the burden of persuasion on the taxpayer to rebut the IRSs
determination.
508
31 U.S.C. 5322(a). By contrast, the criminal penalty is 5 years for false statements
(18 U.S.C. 1001) and 3 years for tax perjury ( 7206(1)). In the criminal prosecutions arising
during the 2009-2011 major IRS initiatives for offshore financial accounts, the plea deal offered to
most defendants was one count of FBAR violation (5 years) or one count of tax perjury (3 years)
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United States or as part of a pattern of any illegal activity involving more than $100,000 in a
12-month period, the criminal penalty increases to 10 years or $500,000 fine, or both.509 Although
the language of this penalty double-up is not as crisp as I would like it, anecdotal evidence, which
I cite in the footnote, suggests that these disjunctives do not include prototypical tax crimes e.g.,
(i) multi-year failure to include on the return and pay tax on the interest income on the foreign
account or (ii) the multi-year failure to report the foreign account(s) on FBARs.510 Willful for
criminal prosecution is, presumably, Cheek511 willfulness - the intentional violation of a known legal
duty, but the latter concept seems to include the criminal concept described as conscious avoidance,
deliberate ignorance or similar labels.512
The criminal statute of limitations is 5 years.513
The civil penalties for failure to file are graduated according to the gravity of the offense.
In part relevant to most taxpayers,514 they are divided into willful violations and nonwillful
related to omitting the income and/or failing to answer the foreign account question properly, with
the defendant given his choice. The Guidelines sentencing range would be the same in any event
and thus the count of plea and conviction would be irrelevant for sentencing but could have some
collateral consequences.
509
31 U.S.C. 5322(b).
510
Although a case might be made that the disjunctives in the double-up statutory text
might catch the prototypical tax crime or the failure to file FBARs involving foreign accounts
exceeding $100,000, anecdotal evidence implies that the Government and courts do not apply the
statute to cover such conduct. In the criminal convictions to the date of this article arising from the
Governments offshore financial account initiative commencing with the UBS onslaught in 2009,
several defendants have pled to FBAR violations. In those cases which have been sentenced to date,
all parties involved in the process the Government, the defendant, the Probation Office and the
court seem to have acted on the assumption that the five year criminal penalty applied. Of course,
in those cases, it seems clear that the courts were not going to actually impose penalties beyond the
undoubled penalties, so these anecdotal instances may not be true indicators of whether the doubled
penalties could apply to an extreme, but prototypical, tax crime. Finally, a word of caution. Similar
language on the double up is contained in S.G. 3S1 which is the Sentencing Guideline applying to
FBAR criminal violations.
511
Cheek v. United States, 498 U.S. 192 (1991).
512
This concept is too large to develop in this text. I do note that the Supreme Court
recently blessed this concept in a civil context and, in doing so, seemed in dicta to bless it in a
criminal context. Global Tech Appliances, Inc. v. SEB, ___ U.S. ___, 131 S. Ct. 2060 (2011). I
dont think that the application of this concept in the criminal area is yet settled.
513
18 U.S.C. 3282.
514
There are some penalties applicable for violations by financial institutions and
nonfinancial trades of businesses. 31 U.S.C. 5321(a)(6)(a) (dealing with negligent and pattern of
negligence. I do not discuss these here because the current enforcement focus is on the individual
FBAR violations which I do discuss in the text.
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violations:515 (i) if not willful, up to $10,000 per violation (which the IRS interprets as per account
not disclosed per year)516 but with a reasonable cause exception517 and (ii) if willful, up to the greater
of $100,000 or 50% of the balance in the account(s) at the time of the violation.518 These penalties
apply to false FBARs, but false FBARs are more likely to draw the willful penalty because the filing
of the FBAR establishes the filers knowledge of the FBAR requirement and an inference of
willfulness in leaving one or more accounts is easier to draw. Willful for this purpose is,
presumably, also Cheek willfulness - the intentional violation of a known legal duty.519 This
formulation probably also allows for willfulness to include the concept variously known as
conscious avoidance, willful blindness or reckless disregard.520 Although the willful standard is the
515
This summary is drawn from the IRS web page titled Workbook on the Report of
Foreign Bank and Financial Accounts (viewed on 8/31/2009 and reviewed or updated on 2/19/09.
The web page is at http://www.irs.gov/businesses/small/article/0,,id=159757,00.html.
The table at the web site includes a $500 penalty which appears to relate only to types of
business rather than just persons who must file the FBAR. See 5321(a)(6).
516
18 U.S.C. 5321(a)(5)(b)(1) (applying penalty to a violation); see IRM 4.26.16.4
(07-01-2008), FBAR Penalties, par. 7, applying penalty per account, although noting that
examiners are to apply discretion in the application of the penalties. I should note that I am not
certain that the IRSs interpretation permitting the penalty to apply to per account per year is correct.
In this regard, I have found that there seems to be a high preponderance of U.S. persons from some
countries (such as India) who have multiple accounts with small amounts, some times many
multiples of such accounts. In this case, applying the nonwillful penalty per account per year could
be draconian and even exceed the willful penalty. Where this would be particularly sinister is
whether the IRS just did not want to bother making the extra level of proof required for the willful
penalty. I dont think the IRS would do that except in truly exceptional cases (i.e., where there is
some other egregious misconduct, such as drug dealing).
517
The statutory text for the reasonable cause exception appears odd and must be
interpreted in context. The exception requires both reasonable cause and that the the balance in
the account at the time of the transaction was properly reported. In the case of a failure to report
(either no FBAR filed or an FBAR filed with the account omitted), the failure to report or report
properly is, of course, the act that causes the filer / nonfiler to be at risk for the penalty in the first
place. Surely, a reasonable interpretation of the statute must mean something other than the original
failure to file or filing improperly. The Internal Revenue Manual sensibly, at least in the case of
failure to file (the most common of the two patterns), This means that the examiner must receive
the delinquent FBARs from the nonfiler in order to avoid application of the non-willfulness
penalty. IRM 4/26/16/4/4 (07-01-2008).
518
31 U.S.C. 5321(a)(5)(C).
519
IRM 4.26.16.4.5.3 (07-01-2008) defines willfulness as a voluntary, intentional
violation of a known legal duty, which is the same as the Cheek / Pomponio definition of
willfulness for purposes of the criminal tax provisions.
520
See IRM 4.26.7.4.2 (06-20-12). The Supreme Court blessed this concept as a basis
for willfulness in a civil context in Global Tech Appliances, Inc. v. SEB, ___ U.S. ___, 131 S. Ct.
2060 (2011). See in the context of FBAR willfulness penalty, United States v. Williams, 2012 U.S.
App. LEXIS 15017 (4th Cir. 2012) (unpublished); and United States v. McBride, 2012 U.S. Dist.
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stated same as the criminal Cheek standard, the limited case authority to date seems to be more
willing to apply the penalty in the FBAR civil penalty than they might in a criminal willfulness
case.521 For the nonwillful penalties, it is not clear exactly how the burden of proof, since there is
virtually no learning on that subject. Presumably, since this is not a tax penalty where factors
inherent in the tax system may require some burdens to be borne by the taxpayer, the IRS will have
to prove its entitlement to the penalty by the standard civil more likely than not burden and the
taxpayer will have to prove entitlement to the reasonable cause exception.
The IRS is not required to assert the full amounts, but may assert some lesser amount
depending upon mitigating factors such as no prior history of FBAR violations, taxpayer cooperation
LEXIS 161206 (D. Utah 11/8/12).

521
United States v. Williams, 2012 U.S. App. LEXIS 15017 (4th Cir. 2012)
(unpublished); and United States v. McBride, 2012 U.S. Dist. LEXIS 161206 (D. Utah 11/8/12).
A related question is the burden of persuasion for the Government to establish liability for the
penalty. The lower court in Williams said that the preponderance of the evidence standard applied.
United States v. Williams, 2010 U.S. Dist. LEXIS 90794 (E.D. Va. 2010), reversed on other
grounds without reaching the standard of proof issue, 2012 U.S. App. LEXIS 15017 (4th Cir. 2012).
So, as of now, the only two courts that have addressed the burden of persuasion issue (Williams and
McBride) have held said that they were applying the preponderance of the evidence standard. I
think that there is still some possibility that, ultimately, the clear and convincing test, normally
applicable in civil cases to allegations of fraud, might apply. See generally Grogan v. Garner, 498
U.S. 279 (1991) (applying, however, preponderance of evidence for fraud exception to bankruptcy
discharge because of the nature and context of that exception to discharge). For example, if the IRS
asserts the civil fraud penalty under 6663, the Code only says that the burden of proof is on the
IRS ( 7454(a)) but the Code is silent as to whether the burden is preponderance of the evidence or
clear and convincing. The law is clear that the IRS must prove fraud by clear and convincing
evidence. See T.C. Rule 142(b); John Gamino, Tax Controversy Overburdened: A Critique of
Heightened Standards of Proof, 59 Tax Law. 497, ___ n. 38 (2006) (Tax Court Rule 142(b) echoes
the statutory language but specifies the clear and convincing standard by which the government must
carry its burden. While not technically controlling in other courts, Rule 142(b) is representative of
the broadly prevailing rule.). The clear and convincing burden is conceptualized as heavier than
preponderance (the normal civil burden) and lighter than beyond a reasonable doubt (the criminal
burden). The term willfulness in the FBAR statute has the same meaning as willfulness in the
criminal tax statutes and the civil fraud penalty. For that reason, the IRS itself has recognized that
it would expect courts to apply a clear and convincing standard. See ILM 200603026 (1/20/06)
(Because the FBAR penalty is not a tax or a tax penalty, the presumption of correctness with
respect to tax assessments would not apply to an FBAR penalty assessment for a willful violation
another reason we believe that the Service will need to meet the higher standard of clear and
convincing evidence.) I have addressed this issue in more detail in blog entries on the Federal Tax
Crimes blog and refer readers to the blog under the key word FBAR Civil Penalties for further
discussion and developments.
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in the investigation, and IRS failure to assert a penalty as to any income tax under-reported related
to account.522
The FBAR civil penalty statute of limitations is six years for the assessment.523 Unlike tax
assessments, Treasury has no self-enforcement mechanisms, such as liens and levies. Rather, after
assessment, Treasury then has a two year period to sue for recovery.524 If Treasury obtains a
judgment in that suit, Treasury will then have the judgment remedies applying to judgments
generally.525
522
IRM 4.26.16.4.6 (07-01-2008). Indeed, some have argued that the full bore
application of the maximum willful penalty may implicate constitutional excessive fine limitations
in the Eighth Amendment. Steven Toscher and Barbara Lubin, When Penalties Are Excessive -The Excessive Fines Clause as a Limitation on the Imposition of the Willful FBAR Penalty, Journal
of Tax Practice & Procedure 69 (Dec.-Jan. 2009). Perhaps for this and just fairness reasons (perhaps
the two are different, although they intersect at the extreme), the IRS has traditionally provided
guidelines to its agents to mitigate the full bore application of the penalty. See IRM 4.26.16.4.6
(07-01-2008). And, in the worst of the worst cases that have been brought for criminal prosecution
since 2009, the IRS has sought a single 50% penalty for the high year rather 50% per year as the
statute permits. In any event, for further discussion on this issue, see my discussion and others
comments in my Federal Tax Crimes Blog titled FBAR Penalties and Excessive Fines at:
http://federaltaxcrimes.blogspot.com/2010/03/commenter-requested-further-discussion.html.
Readers interested in this issue might consider a similar concern if the nonwillful penalties are
applied per year per account which, depending upon the number of accounts and amounts in the
accounts, could approach or even exceed the willful penalty, particularly if the IRS practice is, as
it seems to be, to assert the willful penalty only in a single year. Indeed, applying the nonwillful
penalty in that way could be a proxy for the willful penalty permitting the IRS to avoid the more
onerous burden of proof for the willful penalty.
523
31 U.S.C. 5231(b)(1).
524
31 U.S.C. 5322(b).
525
One question that has arisen for which there is no crisp answer is whether the IRS
can use offset an otherwise due refund against an assessed FBAR penalty that has not been reduced
to judgment. I think the answer to that question is no, but I have not found authority that states it
as crisply as I would like. Section 6402(a) does permit the IRS to offset past-due legally enforceable
debts to and certified by any other federal agency. The technical issue would be whether the FBAR
penalty is legally enforceable before the court suit. I guess one could argue that the debt is legally
enforceable if Treasury has the right to enforce it in an FBAR collection suit. However, the scheme
of the FBAR penalty statute is not to permit any collection measures until judgment. So, I am not
sure whether the IRS could invoke this provision upon certification that the FBAR penalty has been
asserted but Treasury has not yet brought a suit which is the taxpayers only forum to test whether
the FBAR represents a legally enforceable debt. Until this issue is clarified, taxpayers with actual
or potential FBAR penalties can mitigate the risk of the problem by managing the payments to the
IRS to eliminate or minimize overpayments. Now, once a judgment on the FBAR assessment is
made and the taxpayer has had the opportunity to contest, then I think the IRS can use the general
offset authority. 31 CFR 5.4(a)(6).
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The IRS will investigate FBAR violations in much the same way it handles audits and
appeals to the Appeals Office.526 Upon completion of the investigation and the appeal to the Appeals
Office (if appealed), the Secretary of Treasury may assess the penalty without any statutorily
required predicate act (such as a notice of deficiency).527 The FBAR penalty is not a tax or tax
related penalty and may be assessed by Treasury without any predicate act (such as a notice of
deficiency as required for most tax assessments); but, since not a tax, the Treasury may not use the
collection tools for tax assessments (covered in Chapter 14, below) but proceeds via a suit for which
it has a special two year period to sue for recovery.528
Persons required to file FBARs must maintain records containing considerable detail about
the foreign account(s) for five years.529 There are two significant consequences of this required
records obligation. First, the FBAR civil penalty will apply if, upon request, the taxpayer has not
maintained the required records.530 Second, under the required records doctrine, these records may
be excepted from any Fifth Amendment privilege that a person may otherwise have to oppose their
compulsory production, although there is currently significant litigation that should flesh out
whether the required records doctrine applies in an FBAR related context.531
526
See Toscher & Stein, supra, p. 42.

Williams v. Commissioner, 131 T.C. No. 6 (2008).
528
31 U.S.C. 5321(b).
529
31 CFR 103.32.
530
The IRS usually will not seek to collect the penalty for both the FBAR failure and
the required records failure, although the statute permits the penalty for both of the proscribed
conducts. Jeremiah Coder, District Court Allows Second FBAR Penalty Collection to Proceed, 2012
TNT 219-3 (11/10/12) (quoting an IRS attorney prominently involved in the IRSs offshore accounts
initiatives, who added that FBAR failure-to-file penalty is significant enough that an additional
penalty for the failure to keep records is usually unnecessary, and noting that he is not aware of the
application of both penalties).
531
This is one of the hot current issues. In brief, although a compelled party has no
Fifth Amendment privilege for the contents of documents, the compelled party does have a Fifth
Amendment privilege as to any testimony inherent in his or her act of production of the compelled
documents. See United States v. Hubbell, 530 U.S. 27, 35-36 (2000). Notwithstanding this, before
the act of production nuance to the Fifth Amendment privilege was recognized and fully fleshed out,
a competing doctrine called the required records doctrine was recognized to deny any Fifth
Amendment privilege with respect to documents required to be kept, such as the foreign account
required records. Shapiro v. United States, 335 U.S. 1, 17 (1948). As of this writing, three Courts
of Appeals have addressed the issue for foreign bank account required records and all held that the
Fifth Amendment did not apply to foreign account required records. M.H. v. United States (In re
Grand Jury Investigation M.H.), 648 F.3d 1067 (9th Cir. 2011), cert. denied 2012 U.S. LEXIS 4748
(U.S., June 25, 2012); In re: Special February 2011-1 Grand Jury Subpoena Dated September 12,
2001, 691 F.3d 903 (7th Cir. 2012); In re Grand Jury Subpoena, 696 F.3d 428 (5th Cir. 2012). Other
cases are bubbling around in the district courts with mixed results, but they are being appealed or
have been appealed. Given their uncertain status, I do not cite them here.
527
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c.
The New Form 1040 Form 8938.
Bank Secrecy Act information forms like the FBAR are generally just information forms
submitted to the agency (here, Treasury) separately from any tax form. Congress sometimes
requires information forms (such as Form 5471) to be attached to tax returns. Congress recently
passed an information report, effective for the tax year 2011, for offshore accounts that is to be
included with the tax return. The report parallels the type of information included in the FBAR.
Individual taxpayers with an interest in a specified foreign financial asset during the taxable year
must attach a disclosure statement, Form 8938, to their income tax return for any year in which the
aggregate value of all such assets is greater than $50,000 (or such higher dollar amount prescribed
by the IRS).532 The IRS recently prescribed that the Form is required in the following circumstances
with the reporting thresholds as indicated: (i) an unmarried taxpayer having specified foreign
financial assets that have a value of more than $50,000 on the last day of the year or $75,000 at any
time during the year; (ii) married taxpayers residing in the U.S. and filing a joint return having
specified foreign financial assets of more than $100,000 on the last day of the year or $150,000 at
any time during the year; (iii) married taxpayers filing separate returns and residing in the U.S.
having specified foreign financial assets of $50,000 on the last day of the tax year or more than
$75,000 at any time during the year; and (iv) taxpayers living abroad (a) not filing a joint return and
having specified foreign assets of $100,000 on last day of the year or $300,000 any time during the
year and (b) filing a joint return and having specified assets of $400,000 on the last day of the year
or $600,000 any time during the year.533 There are certain limited exceptions for reporting assets
that are reported elsewhere on tax forms (not the FBAR).534
Form 1040 Schedule B will continue to ask for information about foreign accounts and
advising the taxpayer of the obligation to file the FBAR. The requirement to file the FBAR is
independent of the obligation to file Form 8938 with the tax return. As a tax return filing, the Form
8938 is subject to 6103's secrecy rules, and thus not generally available to other law enforcement
agencies.
Reportable specified foreign financial assets are depository or custodial accounts at foreign
financial institutions and, to the extent not held in an account at a financial institution, (1) stocks or
532
6038D(a). For purposes of the penalty (discussed in the text below), there is a
presumption that the $50,000 threshold is met if the IRS determines that the taxpayer has one or
more specific foreign financial assets and does not supply adequate information to determine that
the aggregate value of all such assets is below the threshold. 6038D(e). The Form 8938 is
required by statute for taxable years beginning after March 18, 2010, but the IRS issued Notice
2011-55 that suspends the requirement for returns before the IRS releases the final of Form 8938
but requires that, once finalized, the suspended Form must be filed with the next return.
533
http://www.irs.gov/businesses/corporations/article/0,,id=251217,00.html (Last
Reviewed or updated 12/15/11 and viewed on 12/21/11.)
534
For example, a foreign financial account does not have to be reported on Form 8938
if it is reported on: (i) Form 3520 reporting related to foreign trusts, (ii) Form 5471 reporting related
to certain foreign corporations; (iii) Form 8621 reporting related to a passive foreign investment
company and (iv) Form 8891 reporting related to certain Canadian Registered Retirement Plans.
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securities issued by foreign persons, (2) any other financial instrument or contract held for
investment that is issued by or has a counter-party that is not a U.S. person, and (3) any interest in
a foreign entity.535 The IRS interprets these terms broadly, so IRS pronouncements must be
consulted each time the issue arises, particularly during the early years of implementation when the
IRSs interpretations may be in a period of flux.536 The assets and foreign institutions and the
maximum values during the year must be reported.537
The criminal penalties related to the form are the standard criminal penalties for tax
obligations. The most likely criminal penalties are evasion ( 7201) for underreported or underpaid
taxes related to income from the assets required to be disclosed and tax perjury ( 7206(1)) either
for underreporting the related income or presenting false information on the Form. The criminal
statute of limitations is six years.538
The civil penalty for failure to file the form or failure to file a complete and correct form is
$10,000 with an additional incrementing penalty if the taxpayer fails to provide the information to
the IRS after the IRS notifies the individual of the failure to disclose.539 The penalty increases by
$10,000 for each 30 day period after the notice. There is a reasonable cause exception to this failure
to disclose penalty.540 In addition, a 40% new accuracy related penalty applies to any
understatement attributable to undisclosed foreign financial assets. This penalty provision not only
applies to this new section but older sections requiring disclosure of foreign financial assets (such
as Form 5471). Finally, of course, the traditional 75% civil fraud penalty can apply to the related
understatement.
Contemporaneously with enacting this new provision, Congress provided two special statute
of limitations provisions related to these assets and the income from them. First, if the taxpayer
omits gross income exceeding $5,000 attributable to the foreign assets (regardless of whether the
assets themselves are reported), the statute of limitations is 6 years rather than the normal 3 years.541
535
6038D(b).
One issue I have fielded often is whether foreign real estate held by an individual
directly and not through a foreign entity is a foreign financial asset. The answer is no, at least in the
IRSs most recent pronouncement. I cite that pronouncement in a blog on my Federal Tax Crimes
Blog, titled Form 8938 and Real Estate (And Other Foreign Assets) (3/21/12),
http://www.federaltaxcrimes.blogspot.com/2012/03/form-8938-and-real-estate-and-other.html. I
direct readers to that blog and any comments under that blog for further on the issue.
537
6038D(c).
538
6531.
539
6038D(d). This does not appear to be a separate penalty for each asset not
disclosed or misstated. By contrast, as noted earlier, the IRS interprets the FBAR nonwillful penalty
to apply per account per year.
540
6038D(g).
541
This statute extensions applies to all returns the statute for which was otherwise open
on March 18, 2010, the effective date of enactment. This means that the 2006 year, with its 1040
due date of 2007, will be open because the normal 3 year statute made it open on March 18, 2010.
536
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Second, the failure to report this foreign financial asset information and other types of information
regarding foreign activity subjects the entire return to an open statute of limitations that does not
expire until three years from the date the taxpayer furnishes the information required to be disclosed
unless the failure is due to reasonable cause and not willful neglect.542 The second provision remains
open whether or not the taxpayer reported the income from the foreign financial assets or other types
of specified activity.
The IRS is authorized to promulgate regulations necessary to carry out the intent of the Code
provision.543
C.
Money Laundering.
1.
Introduction.
The term money laundering generally refers to a process intended to conceal the existence,
illegal source, or illegal application of income, and in some way disguise it so as to make it appear
legitimate. As we will see, a separate criminal offense is a predicate for money laundering, but the
act of money laundering is separate from the predicate criminal offense.544 Money laundering is an
important element of the crimes with the highest national criminal enforcement priorities -- such as
organized crime, drug dealing and terrorism. The notion is that substantial penalties for this conduct
will not only punish but will deter the underlying criminal conduct. Congress imposed those
penalties in the Money Laundering Control Act of 1986.545 The Act was designed to target financial
Earlier years will be affected by the rule if there were some other event that caused the statute to be
open on March 18, 2010. If that other event were the 25% omission rule causing a 6 year statute,
the new statute will be irrelevant, because the statute will be 6 years anyway. Hence, practically,
it would seem to have actual consequences for pre-2006 returns where there was a statute extension
still in effect on March 18, 2010. For a good discussion of these interplays, see IRS Memorandum
from Director, Examination Policy, dated 3/9/12, here:
http://www.irs.gov/pub/foia/ig/sbse/sbse-25-0312-022.pdf.
542
6501(c)(8), (as amended by the HIRE Act (FATCA provisions) and then by Pub.
L. 111-226 (124 Stat. 2403), 218 (8/10/10)).
543
6038D(h).
544
In United States v. Christo, 129 F.3d 578, 579-580 (11th Cir. 1997), the court
reasoned that The main issue in a money laundering charge, therefore, is determining when the
predicate crime becomes a completed offense after which money laundering can occur; hence,
as in Christo, where the underlying predicate offense was bank fraud and misapplication of bank
funds, the Government cannot treat the events establishing the predicate offense as the events giving
rise to money laundering, noting that We do not accept that money laundering is inherent in bank
fraud or misapplication of funds. Another court viewed Christo as holding that a money laundering
charge is precluded on for a financial transaction which is an essential element of the underlying
criminal act. United States v. Maali, 358 F.Supp.2d 1154 (M.D. Fla 2005).
545
Codified in 18 U.S.C. 1956 and 1957.
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transactions connected to organized crime and narcotics trafficking, but it sweeps much broader that
those limited targets.
As you will see, in most cases, the focus of the money laundering statutes is not concern
about taxes. But, tax crimes frequently travel with money laundering, and, in some cases, money
laundering is necessary to the tax crime as the taxpayer chooses to implement the tax crime.
There is extraterritorial jurisdiction for the crime meaning that the U.S. can charge, try and
convict a U.S. citizen for the described conduct anywhere in the world and a foreign citizen for any
conduct anywhere in the world if a part of the conduct occurs in the U.S.546
The provisions are very complex. So I just summarize them here.547
2.
1956 Money Laundering.
Several separate crimes are included in these provisions. I outline the crimes and their
elements here. The punishment is up to 20 years incarceration and substantial fines,548 although both
are subject to the rules under the CFEA and the Sentencing Guidelines. The person is also subject
to a civil penalty in the greater of the value of the property involved or $10,000.549
a.
Transaction Money Laundering.
Section 1956(a)(1) is the crime of transaction money laundering. In summary, the elements
are:
(1) The person must conduct or attempt to conduct a financial transaction.
As you surely suspect, financial transaction is defined quite broadly.550
(2) The person must conduct the financial transaction with knowledge that
the proceeds of unlawful activity is involved.551 The knowledge must simply be
that unlawful activity is involved; that knowledge need not be that specified
unlawful activity (a term discussed below) is involved. Proceeds means gross
revenue.552 Furthermore, in a controversial decision, the Third Circuit held with
546
1956(f).
The statutes are in the separate materials volume available to students.
548
1956(a)(1) (flush language), (a)(2) (flush language) and (a)(3) (flush language).
549
1956(b).
550
1956(c)(3) & (4).
551
1956(a)(1).
552
The Fraud Enforcement and Recovery Act of 2009, Pub. L. No. 111-21, 386, 123
Stat. 1617 (2009), changing prospectively the Supremes holding in United States v. Santos, 553
U.S. 507 (2008) that proceeds meant net profits. (I have perhaps oversimplified the Supreme
Courts fractured holdings in Santos (see e.g., United States v. Hosseini, 679 F.3d 533, 551-552 (7th
547
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respect to Virgin Islands tax: [u]npaid taxes, which are unlawfully disguised and
retained by means of the filing of false tax returns through the U.S. mail, constitute
proceeds of mail fraud for purposes of supporting a charge of federal money
laundering.553 Does this mean, by extension, that every false tax return and
resulting underpayment could be a money laundering crime?
(3) The financial transaction must in fact involve the proceeds of specified
unlawful activity (SUA).554 The defendant need not know that the proceeds were
from an SUA.555 SUA is defined broadly to include the crimes, both federal and
state, that Congress thought particularly involved in organized crime, drug dealing
and other national criminal enforcement priorities.556 These include (a sampling for
flavor): drug dealing, murder, kidnapping, extortion, and destruction of property by
explosive or fire. A host of other crimes are included within the sweeping definition
of SUA, including the RICO predicates. However, tax crimes are not among SUA.
So, if all we are talking about is a tax crime and no other crime that falls within the
term SUA, we need not be concerned about this crime. (As I will note, however, if
an SUA is involved, the fact that the transaction promotes a tax crime can satisfy
another element of the offense.) Although tax crimes are not SUA, the steps in
pursuing tax crimes almost invariably include some aspect of mail or wire fraud,
which is an SUA.557 DOJ policy requires that DOJ Tax approve all criminal charges
against a defendant in connection with conduct arising under the internal revenue
laws, regardless of which criminal statutes the United States Attorney proposes to
use in charging the defendant; DOJ Tax approval will not be given where the
effect would merely be to convert routine tax prosecutions into money laundering
prosecutions, as the statute was not intended to provide a substitute for traditional
Cir. 2012)), but not in a way material here, particularly given the statutory change.)
553
United States v. Yusuf, 536 F.3d 178 (3d Cir. 2008), cert. denied 549 U.S. 1338
(2007). See CTM 25.03[1] (2008 ed.) (Noting that Yusuf created a conflict with United States v.
Khanani, 502 F.3d 1281, 1296-97 (11th Cir. 2007), in which the Eleventh Circuit held that the
definition of proceeds is limited to something which is obtained in exchange for the sale of
something else, and thus does not include retained taxes.)
554
1956(a)(1).
555
For this reason, if the defendant is charged with both the SUA and the money
laundering with respect to SUA proceeds, an acquittal on the SUA count will not defeat the money
laundering count so long as the defendant is shown to have the requisite knowledge that the
transaction involved proceeds of criminal activity (a broader category than SUA). United States v.
Richard, 234 F.3d 763, 768 (1st Cir. 2000) ; see also United States v. Irvin, 682 F.3d 1254, ___ (10th
Cir. 2012) (citing Richard for the proposition that that acquittal on predicate offense of bankruptcy
fraud did not require reversal of his conviction for money laundering, but seeming to me to confuse
that concept with notions of approving inconsistent verdicts.
556
See 1956(c)(7).
557
See e.g., United States v. Yusuf, 536 F.3d 178 (3d Cir. 2008), cert. denied 129 S. Ct.
2764 (2009).
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Title 18 and Title 26 charges related to tax evasion, filing of false returns, or tax
fraud conspiracy.558
(4) Any one (or more, but at least one) of the following must be present:
(i) the person intends by the financial transaction to promote an
SUA;559 or
(ii) the person engages by the financial transaction to violate 7201
(tax evasion) or 7206 (such as tax perjury, aiding and assisting);560
or
(iii) The person knows that the transaction is designed to conceal the
location, nature, etc. of the proceeds of the SUA;561 or
(iv) The person knows that the transaction is designed to avoid a
transaction reporting requirement under state or federal law.562
The financial transaction itself is the conduct punished. It does not matter that there is some
bar to the Government prosecuting for the underlying SUA. The Government will have to prove the
SUA in order to prevail in the money laundering charge, but it need not prosecute the putative
offender for the SUA.
This has dramatic implications with respect to the statute of limitations, which starts for a
new prosecution every time the person or his or her cronies (aka conspirators) do something with
the proceeds that constitutes a financial transaction so long as the other elements are present. The
underlying offense itself may be no longer prosecutable because of the statute of limitations, but
conducting financial transactions with the proceeds may be prosecutable.
To put all of this in a tax crimes context, legal source tax crimes do not constitute this type
of money laundering at all. See element 3 requiring an SUA; a tax crime is not an SUA. Moreover,
even proceeds of illegal income will not constitute money laundering unless the proceeds arise from
an SUA. Id. And, even if the proceeds do arise from an SUA, a monetary transaction is not
558
CTM 25.01 (2008 ed.). DOJ Tax approval is not required where the gravamen of the
offenses for which criminal charges are warranted are consistent with the serious offense of money
laundering and not just tax offenses leveraged into money laundering. Specifically, DOJ Tax
approval is not required where (Id.):
(1) the principal purpose of the financial transaction was to accomplish some other
covered purpose, such as carrying on a specified unlawful activity like drug
trafficking; (2) the circumstances do not warrant the filing of substantive tax or tax
fraud conspiracy charges; and (3) the existence of a secondary tax evasion or false
return motivation for the transaction is one that is readily apparent from the nature
of the money laundering transaction itself.
559
1956(a)(1)(A)(i).
560
1956(a)(1)(A)(ii).
561
1956(a)(1)(B)(i).
562
1956(a)(1)(B)(ii).
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criminalized unless one of the conditions in the fourth element is met. Please review those four
conditions again at this time. So, if a defendant simply makes a single deposit of $100,000 cash
proceeds from an SUA into his or her U.S. bank account without anything more, that monetary
transaction will not be money laundering because, to tick through the four conditions: (i) by the
financial transaction, the defendant did not intend to promote an SUA (mere use of the proceeds
does not promote unless used to promote and all we have is a deposit into an account); (ii) by the
financial transaction, the defendant did not intend to commit the prescribed tax crimes (the defendant
may commit a tax crime later by not reporting the proceeds, but the mere straight-forward deposit
into his checking account has no relationship to the tax crime); (iii) by the financial transaction, the
defendant did not conceal or disguise it is just a straightforward deposit of cash into the bank
account; and (iv) by the financial transaction, the defendant did not attempt to avoid a reporting
requirement (i.e., the defendant made a single deposit for which the bank is required to make file
a CTR; hence the financial transaction was not designed to avoid a reporting requirement). Of
course, most persons conducting an SUA are going to meet one of the conditions, because avoiding
them waives red flags as their illegal conduct. But, as suggested by this example, a person
conducting the SUA can thread the needle to avoid a money laundering charge by carefully using
the proceeds in a way that avoids all of the four conditions.
Finally, just to remind you about a key element of tax crimes the willfulness element. As
we have noted previously, willfulness is not an element of most crimes. Willfulness for tax crimes
means the intentional violation of a known legal duty generally interpreted pungently that the
defendant knew that his or her conduct was a crime. Ignorance is an excuse. But Congress did not
impose a willfulness element to this crime. The defendant must act knowingly, that is he must have
knowledge and intend what he or she is doing, but he does not need to know that what he is doing
constitutes the crime of transaction money laundering. However, if the Government is going to rely
upon the second condition in the fourth element above i.e., that the defendant conducted the
financial transaction the intent to commit the specified tax crime the Government must prove
willfulness with respect to the intended tax crime. The Government will have to prove that the
defendant knew that his conduct relative to his taxes was a crime. 563 The statute requires only that
the person must intend to commit the prescribed tax crime, not that he or she actually committed
the crime.564 Moreover, the mere concealment of proceeds or other actions which might, in other
contexts be some proof of a tax crime (e.g., Spies affirmative acts) may not be indicative of a tax
crime because they may simply be acts to conceal the SUA rather than the tax crime.565
563
CTM 25.03[2][a] (2008 ed.)

CTM 25.03[2][a] (2008 ed.).
565
CTM 25.03[2][a] (2008 ed.). I suspect that, in truth, in most SUA situations, acts of
concealment are motivated by desire to hide the underlying crime will little or no thought about
taxes.
564
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b.
Transportation Money Laundering.
There is a separate offense for so-called transportation money laundering.566 The elements
are:
(1) Transportation of monetary instrument or funds into, outside of or
through the U.S.
(2) Any one of the following:
(a) Intent to Promote SUA; or
(b) Knowledge that instrument or funds represent proceeds of
unlawful activity and either of the following :
(i) intent to conceal the location, source, ownership, etc.; or
(ii) avoid a transaction reporting requirement.
c.
Sting Operations.
Persons caught in the trap of sting operations can be subject to money laundering charges567
if the following elements are present:
(1) they conduct or attempt to conduct a financial transaction
(2) with proceeds represented to be proceeds of SUA or to be used for SUA
(3) with the intent to do any one of the following:
(a) promote the carrying on of an SUA;
(b) conceal or disguise the nature, source, ownership, etc. of the
proceeds of the SUA;
(c) avoid a transaction reporting requirement of State or Federal law.
3.
1957 Money Laundering.

a.
Introductory Comment.
Section 1957 sanctions one who knowingly engages, or attempts to engage, in a monetary
transaction in criminally derived property, which has a value greater than $10,000 and is derived
from specified unlawful activity (SUA). It is not required that the recipient actually exchange or
launder the funds, nor that he have any specific intent to further or conceal unlawful activity. The
scope of 1957 may be broad enough to criminalize seemingly innocent acts or commercial
transactions. In enacting 1957, Congress intended to dissuade people from conducting even
ordinary commercial transactions with people suspected to be involved in criminal activity.
However, 1957 does require that the violator knowingly engage in a transaction involving
566
567
1956(a)(2).
1956(a)(3).
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criminally-derived property. The penalty is up to 10 years incarceration and fine under the CEA or
alternatively up to twice the amount of the criminally derived property involved in the transaction.568
b.
Key Elements.
(1) the person knowingly engaged or attempts to engage in a Monetary

Transaction;
(2) involving Criminally Derived Property, which is actually derived from
SUA.
4.
Overlap.
Section 1957 is much simpler than 1956 in terms of elements and covers more ground. To
take a simple example. Individual A has committed wire fraud, which of course is an SUA under
either section. The fruits of the wire fraud are deposited in a tax haven bank account. A did not
commit the fraud so that he could post the money in the tax haven bank account; instead, A
committed the crime to enjoy the money. The bank account is simply a resting place until he enjoys
the money. Then, he has the money wire transferred to his U.S. bank account so that he can buy a
fancy residence. Is the wire transfer prosecutable under either or both sections? The wire transfer
is not prosecutable under 1956 because the wire transfer is into individual As personal bank
account and easily on the radar screen of the IRS and anyone else with access to U.S. bank
information. There is no intent to conceal in the transaction, a required element for 1956. But,
intent to conceal is not a required element under 1957, so he is prosecutable under that section.
5.
Conspiracy.
Persons who conspire to violate either of these Sections are subject to the same penalties as
provided in the Sections rather than the 5 year penalty provided in the general conspiracy statute (18
U.S.C. 371).569
568
1957(b).
1956(h). In Conley v. United States, 349 F.3d 837 (5th Cir. 2003), the court held
that an indictment count charging conspiracy under 371 but referencing 1956(h) in a sole
reference could not support a conviction under 1956(h). The court used the fact that the defendant
was acquitted of the underlying money laundering counts charged to suggest that it was not clear
that the jury, in rendering its general verdict of guilty on the conspiracy count, understood that it was
convicted under 1956(h) or 371. But query, if the charge was conspiracy to violate the money
laundering statutes, the conviction does occur under 371; all 1956(h) appears to do is to increase
the penalty.
569
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6.
Materials.
a.
Interface Between Money Laundering and Tax Crimes

(1)
DOJ Tax Control with Overlapping Traditional

Tax Crimes
We will note elsewhere in these materials the elaborate procedures normally attending tax
investigations and prosecutions, requiring many levels of review within the IRS and DOJ. These
procedures are designed to insure that tax prosecutions are consistent with tax enforcement
priorities. These procedures do not apply in money laundering investigations by the IRS. The IRS
thus may make a direct referral of money laundering charges to the United States Attorney, rather
than proceeding through the DOJ Tax.
Where the IRS recommends prosecution for both tax crimes and money laundering, the case
will proceed through the normal review process. Then, provided DOJ Tax approves, the taxpayer
may be charged in a single indictment with tax crimes and money laundering crimes.
The following, from the CTM, is DOJ Tax policy regarding money laundering in the context
of tax crimes:
25.01 TAX DIVISION POLICY
The Tax Division must approve any and all criminal charges that a United
States Attorney intends to bring against a defendant in connection with conduct
arising under the internal revenue laws, regardless of which criminal statutes the
United States Attorney proposes to use in charging the defendant. Conduct arising
under the internal revenue laws includes a defendant's submission of documents or
information to the IRS.570
Prosecution for money laundering offenses requires Tax Division
authorization when (1) the indictment also contains charges for which Tax Division
authorization is required, including allegations of a tax fraud (e.g., Klein) conspiracy,
or (2) the intent to engage in conduct constituting a violation of 26 U.S.C. 7201 or
26 U.S.C. 7206 is the sole or principal purpose of the financial transaction which
is the subject of the money laundering count. USAM 9-105.750.
The Tax Division will not authorize such charges where the effect would
merely be to convert routine tax prosecutions into money laundering prosecutions,
as the statute was not intended to provide a substitute for traditional Title 18 and
Title 26 charges related to tax evasion, filing of false returns, or tax fraud conspiracy.
Appropriate tax-related Title 18 and Title 26 charges should be utilized when the
evidence so warrants. However, the Tax Division will approve money laundering
570
CTM 25.01 (2008 ed.).
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charges when warranted by the circumstances. See Tax Division Directive Number
128.
Tax Division authorization is not required when (1) the principal purpose of
the financial transaction was to accomplish some other covered purpose, such as
carrying on a specified unlawful activity like drug trafficking; (2) the circumstances
do not warrant the filing of substantive tax or tax fraud conspiracy charges; and (3)
the existence of a secondary tax evasion or false return motivation for the transaction
is one that is readily apparent from the nature of the money laundering transaction
itself. USAM 9-105.750.
I include Directive 128, cited in this policy, in the text above at p. 238. Readers should re-read that
Directive now.
(2)
Combining of Counts and Fifth Amendment Issues
Joinder of tax counts with mail or wire fraud and particularly with money laundering counts
can be extremely prejudicial to a taxpayer. In United States v. Jordan, 112 F.2d 14 (1st Cir. 1997),
the defendant was not originally charged with tax crimes, but was instead charged with mail fraud,
wire fraud and money laundering arising from the defendants scheme to steal money from his
corporate employer. At trial, the defendant was acquitted of wire fraud, but a mistrial was declared
on the mail fraud and money laundering counts. Before retrial on those counts, the defendant was
charged with income tax evasion and false returns under 7201 and 7206(1), respectively. In the
ensuing trial in which all charges were joined, the defendant was convicted on all counts. On
appeal, the defendant argued that the joinder of the tax charges deprived him of his right to testify
as to certain counts. The theory was that he and he alone could testify as to his good faith defense
to the tax charges, but if he did so, he would have to waive his Fifth Amendment privilege to the
other charges. The Court accepted the argument, from concern that tagging on the tax charges did
eviscerate his Fifth Amendment rights. The Court cautioned that this was not a general holding that
charges could not be combined, but, on a case by case basis, the courts must review to see whether,
under the circumstances, joinder would not be proper.
Jordan should be contrasted with United States v. Bencs, 28 F.2d 555 (6th Cir. 1994) where
the court found proper joinder where the defendant was convicted of conspiracy, income tax
evasion, money laundering, and structuring financial transactions. The Eight Circuit has synthesized
the holdings with regard to tax charges for omitted income arising from other criminal conduct
charged in the indictment and discussed then the trial courts discretion to avoid the prejudicial
effect of properly joined counts:
Tax charges may be joined with fraud charges if the unreported income arises
solely and directly out of the fraudulent scheme. When the unreported income is
derived from the charged conduct, the tax offense is based on the same act or
transaction as the other offenses. Moreover, failure to file tax returns may have a
logical and temporal relationship with the other offenses charged in the indictment
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such that the tax offenses are connected with or constitute parts of a common scheme
or plan.
****
Once the counts have been properly joined, the district court may order
separate trials on individual counts if it appears that a defendant is prejudiced by
joinder of the offenses. The decision of whether to sever a trial is left to the district
court's sound discretion, and we will not reverse unless the defendant shows an abuse
of discretion resulting in severe prejudice.
[P]rejudice may result from a possibility that the jury might use
evidence of one crime to infer guilt on the other or that the jury might
cumulate the evidence to find guilt on all crimes when it would not
have found guilt if the crimes were considered separately. On the
other hand, a defendant does not suffer any undue prejudice by a joint
trial if the evidence is such that one crime would be probative and
admissible at the defendant's separate trial of the other crime.
If the district court had severed the charges, evidence of Midkiff's fraud
crimes would have been probative and admissible at his tax trial, and evidence of his
failure to file returns would have been probative and admissible in his fraud trial.571
7.
A Caveat for Lawyers and Other Professionals.
For large scale money-laundering, special expertise is required to implement the shell games.
The assistance of white-collar professional experts, such as lawyers, is often required. As a result
of the mass movement of money and the profit potential for such experts, they are readily available
to money launderers. The following is from the State Departments web site:
Lawyers/Notaries, Accountants and Other Non-Financial Professionals
United States law enforcement authorities have observed that as money
laundering schemes become more complex, the perpetrators turn to the learned
expertise of attorneys, accountants, consultants and agent representatives to aid them
in the movement of illegal currency. These professionals, using shell corporations,
nominees and fictitious records, devise elaborate paper trails to disguise the true
source of illegal income. During Fiscal Years 1999 and 2000, 131 attorneys,
accountants and consultants were sentenced as a result of money laundering
convictions. 572
571
United States v. Midkiff, 614 F.3d 431, 439-440 (8th Cir. 2010) (case citations and
572
This phenomenon is true in other areas perhaps less tinged with criminal issues, but
still of high national priority. For example, we have recently seen the corporate tax shelter problem
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D.
Federal Money Laundering Investigation and Compliance Agencies.

1.
Introduction.
Many federal and state agencies have their fingers in the pot of the investigative and
compliance efforts for money laundering. This patchwork of agencies is described in Appendix 2
of The 2001 National Money Laundering Strategy (September 2001), a report of the Office of
Enforcement of the Treasury Department in consultation with DOJ. I draw the balance of the
materials in this section virtually verbatim from that report.
2.
Investigation.
a.
Introduction.
The Departments of Justice and Treasury are the principal federal agencies involved in
enforcing the money laundering laws. A number of components of these agencies share some
responsibility in the full court press on money laundering. Other agencies are also involved to some
extent.
b.
Treasury.
The Treasury branches involved are:
Financial Crimes Enforcement Network (FinCEN).573 FinCEN's mission is to help

safeguard the financial system of the United States from being abused by criminals and
terrorists. FinCEN works to accomplish its mission through: (1) administration of the Bank
Secrecy Act -- a regulatory regime that provides for the reporting of highly sensitive
financial data that are critical to investigations of financial crime; (2) dissemination of the
data reported under the Bank Secrecy Act to law enforcement and, under appropriate
circumstances, the intelligence community; (3) analysis of information related to illicit
finance -- both strategic and tactical analysis; and, (4) the education and outreach provided
to law enforcement and the financial industry on issues relating to illicit finance. FinCEN
has many attributes that are key to understanding the agency and bow it works to achieve its
mission:
explode. According to the Staff of the Joint Committee on taxation in a study of Enrons tax
shelters, highly extremely highly paid lawyers acted as enablers assisting the client in developing
structures to hide ball so that the IRS could not review the tax shelter adequately so that the IRS
would be less able to identify and analyze the overall planning in context. See Joint Committee
Staff, Report of Investigation of Enron Corporation and Related Entities Regarding Federal Tax and
Compensation Issues, and Policy Recommendations, JCS-3-03 (February 2003).
573
The following description of FinCEN is from the prepared testimony of William J.
Fox for an April 29, 2004 Senate Banking Committee Hearing. That testimony is reproduced at
2004 TNT 84-34.
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FinCEN is a regulatory agency. FinCEN has an obligation to administer the Bank

Secrecy Act, the principal regulatory statute aimed at addressing the problems of
money laundering and other forms of illicit finance, including terrorist financing. It
is responsible for shaping and implementing this regulatory regime and, in concert
with the functional bank regulators and the Internal Revenue Service, for ensuring
compliance with that regime. The agency is also charged with protecting the integrity
and confidentiality of the information collected under the Bank Secrecy Act.
FinCEN is a financial intelligence agency. While not a member of the intelligence
community, FinCEN, with the help of the Internal Revenue Service, collects, houses,
analyzes and disseminates financial information critical to investigations of illicit
finance.
FinCEN is a law enforcement support agency. While FinCEN has no criminal
investigative or arrest authority, much of our effort supports the investigation and
successful prosecution of financial crime.
FinCEN is a network. FinCEN is not directed to support one agency or a select group
of agencies. FinCEN makes our information, products and services available to all
agencies that have a role in investigating illicit finance. FinCENs technology tells
us when different agencies are searching the same data and we put those agencies
together -- avoiding investigative overlap and permitting the agencies to leverage
resources and information.
IRS Criminal Investigation (CI). CI investigates criminal and civil money laundering and
currency reporting violations under the criminal and financial codes of Titles 18 and 31, and
has primary investigative jurisdiction for money laundering crimes involving banks and
other financial institutions. It shares investigative jurisdiction with several other federal law
enforcement agencies of criminal money laundering violations. Authority is often shared
with the federal law enforcement agency with the investigative authority over the predicate
crime, if such crime is outside the investigative jurisdiction of CI.
Customs Service. Customs anti-money laundering role is to conduct illegal drug and
currency interdiction at U.S. borders. Customs also enforces the reporting of currency and
monetary instruments brought into or removed from the United States, as required by the
BSA. Customs has a broad grant of authority to conduct international financial crime and
money laundering investigations and initiatives within its role as a border enforcement
agency. This jurisdiction is triggered by the illegal movement of criminal funds, services,
or merchandise across national borders. Customs enforcement efforts focus on international
criminal organizations whose corrupt influence often affect trade, economic, and financial
systems on a global basis. In addition, Customs operates the Money Laundering
Coordination Center, which serves as a depository for all intelligence information gathered
through undercover money laundering investigations and functions as the coordination and
deconfliction center for both domestic and international undercover money laundering
operations.
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Secret Service. The Secret Service investigates money laundering cases as part of its
traditional law enforcement functions. The jurisdiction of the Secret Service includes
computer crimes, counterfeiting and many crimes involving the misuse of national banks and
federally chartered thrift institutions.
Bureau of Alcohol, Tobacco and Firearms (ATF). ATF works, as its name indicates, in
the area of alcohol, tobacco and firearms taxes. However, it has developed criminal
investigation (including lab work skills) that, while not as extensive as the FBIs but are
sufficient assist the tax agencies in investigations and, obviously, in the area of firearms
which are used in many major crimes, have special expertise.
Executive Office of Asset Forfeiture (EOAF). (EOAF) is the Treasurys focal point for
asset forfeiture matters and is responsible for developing and implementing asset forfeiture
policy for the four Treasury law enforcement bureaus and the United States Coast Guard.
The mission of EOAF is to affirmatively influence the consistent and strategic use of asset
forfeiture by Treasury law enforcement bureaus to disrupt and dismantle criminal
enterprises. EOAF supports the law enforcement bureaus money laundering efforts by
reimbursing investigative expenses as well as funding task force or joint operations with
other federal, state, and local law enforcement organizations. Additionally, fund
management has emphasized longer, more in-depth investigations and high impact
forfeitures by focusing funding initiatives on investigative needs.
c.
DOJ.
The Attorney General, as the chief law enforcement officer of the United States, is
responsible for the enforcement of all federal law. Through the Deputy Attorney General and the
Assistant Attorney General for the Criminal Division, and in conjunction with the 94 United States
Attorneys, the Attorney General oversees prosecutions for money laundering offenses. The
following are the principal components involved:
Asset Forfeiture and Money Laundering Section (AFMLS). AFMLS is the DOJs focal
point for money laundering and asset forfeiture matters. The Section devises and implements
DOJ policy initiatives in the domestic and international arenas with particular emphasis in
the work of the Financial Action Task Force and related matters, and in negotiating
international forfeiture sharing agreements. Working closely with law enforcement agencies
and the United States Attorneys, AFMLS participates and aids in the coordination of
domestic and international multi-district investigations and prosecutions. money laundering
and asset forfeiture guidelines and provides legal advice and training to the United States
Attorneys Offices and investigative agencies.
Federal Bureau of Investigation (FBI). The FBI has investigative authority over more than
200 violations of federal law, including money laundering offenses, whether the laundering
is related to drug trafficking, terrorism, bank fraud or espionage. The FBI has sole or
concurrent jurisdiction in 133 of the 164 specified unlawful activities (SUAs) that form
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predicate crimes for money laundering prosecutions. The FBI gathers and analyzes
intelligence data to identify and target the major international and domestic money
laundering organizations. In addition, the FBI conducts long-term complex undercover
money laundering operations to target the criminal money launderer as well as the
underlying criminal activity. The FBI considers money laundering as a principal as well as
an ancillary violation that is pursued in all FBI investigations.
Special Operations Division (SOD). SOD is a joint national coordinating and support
entity initially comprised of agents and analysts from the DEA, the FBI, the U.S. Customs
Service, and prosecutors from the DOJs Criminal Division. SOD coordinates and supports
regional and national-level criminal investigations and prosecutions against major criminal
drug-trafficking organizations. Where appropriate, state and local investigative and
prosecutive authorities are fully integrated into SOD-coordinated drug enforcement
operations. SODs financial component, which includes IRS-CI, assembles all available
information to identify and target the financial infrastructure of SOD targets, assists in
coordinating investigations and prosecutions, and assists in seizing and forfeiting the
proceeds, assets, and instrumentalities of these major drug trafficking organizations.
Drug Enforcement Administration (DEA). The DEA is a specialized bureau of the

Department of Justice whose sole mission is the enforcement of the U.S. drug trafficking
laws. DEA investigates the financial aspects of drug trafficking and works closely with
federal, state, local and county law enforcement agencies in money laundering
investigations.
d.
State Department.
The State Department is responsible for the day-to-day liaison with foreign governments on
policy matters, including money laundering. Primary responsibility for money laundering matters
is vested in the Departments Bureau for International Narcotics and Law Enforcement Affairs
(INL), which participates in anti-money laundering initiatives in a variety of ways, including
publishing an annual report on international money laundering, helping to coordinate with other
agencies intelligence and training and technical assistance on money laundering, and providing
considerable funding for international anti-money laundering training. A prime focus of INLs
training program is a multi-agency approach to addressing international financial crime, law
enforcement development, organized crime fighting, and counternarcotics training. Supported by
and in cooperation with INL, the Justice Department, Treasury Department components (i.e.,
FinCEN and the Office of the Comptroller of the Currency), the Board of Governors of the Federal
Reserve, and non-governmental organizations offered law enforcement and criminal justice
programs worldwide.
e.
United States Postal Service (USPS).
The Postal Inspection Service is the investigative arm of the U.S. Postal Service. It has
investigative jurisdiction for money laundering in connection with Postal related predicate offenses,
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such as mail fraud. The Postal Inspection Service also investigates money laundering involving the
cash purchase of postal money orders, which money launderers often use to transport value out of
the country.
f.
Office of National Drug Control Policy.
ONDCP designates High Intensity Drug Trafficking Areas to reduce illegal drug trafficking
and drug-related crimes and violence in designated high trafficking areas. A significant portion of
HIDTA-related efforts is targeted at the laundering of the proceeds of narcotics trafficking. In 1998,
Congress reauthorized the ONDCP authority, which is codified at 21 U.S.C. 1706.
3.
Compliance.
a.
Recordkeeping and Reporting Requirements.
The recordkeeping and reporting requirements of the BSA are a critical component of the
counter-money laundering regime. Ensuring that financial institutions and other covered persons
and entities comply with these regulatory requirements is the responsibility of a broad range of
executive branch and independent agencies including the federal banking regulators, the Securities
and Exchange Commission, and the Internal Revenue Services Examination Division. In addition,
other agencies, including the Commodity Futures Trading Commission, assist in this process
through the sharing of information and other cooperative efforts.
b.
Federal Bank Regulators.
The periodic compliance examinations conducted by the federal banking agencies and
regulators -- i.e., the Office of the Comptroller of the Currency; the Office of Thrift Supervision; the
Board of Governors of the Federal Reserve System; the Federal Deposit Insurance Corporation; and
the National Credit Union Administration -- significantly deter money laundering. These regulators
ensure that institutions that they supervise have in place adequate anti-money laundering internal
controls and procedures that include, among other things, procedures to ensure compliance with the
reporting and recordkeeping provisions of the BSA and procedures to detect and report suspicious
activity. If, in the course of a compliance review, a federal banking regulator detects a suspicious
transaction that involves potential money laundering, it ensures that either the bank or the agency
files a SAR with FinCEN. In addition, when a regulator determines that a bank has failed to comply
with the reporting requirements of the BSA, it may refer the case to FinCEN for possible civil
penalties. The regulators may also pursue administrative enforcement action under the authority
provided by 12 U.S.C. 1818.
4.
The Securities and Exchange Commission (SEC).
The SEC regulates the U.S. securities markets and market participants, and enforces U.S.
securities laws. The SEC also has the statutory responsibility to establish accounting, auditing and
independence standards, and to oversee the accounting profession to assure that public company
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financial statements are prepared and audited utilizing the highest quality accounting, auditing and
independence standards. The SECs chief responsibility with respect to money laundering is to
assure compliance with the BSAs reporting, recordkeeping, and record retention obligations by
securities brokers and dealers. The SEC investigates and prosecutes securities fraud, which is a
predicate offense of money laundering. In monitoring for and taking action against securities fraud,
the SEC complements the work of criminal law enforcement authorities in their efforts to combat
money laundering.
5.
Internal Revenue Service.
The Internal Revenue Services Examination Division (IRS-Exam) has regulatory

authority for civil compliance with the BSA for many non-bank financial institutions such as
currency dealers or exchangers, check-cashers, issuers and sellers or redeemers of travelers
checks/money orders or similar monetary instruments, licensed transmitters of funds, telegraph
companies, certain casinos and agents/agencies/branches or offices within the United States of banks
organized under foreign law. IRS-Exam conducts on-site BSA compliance exams to ensure that
NBFIs are in compliance with the reporting, recordkeeping and compliance program requirements
of the BSA, and is also responsible for examining and monitoring compliance with the currency
reporting requirement on trades and responsible for examining and monitoring compliance with the
currency reporting requirement on trades and businesses
6.
Commodity Futures Trading Commission (CFTC).
The CFTC administers and enforces federal futures and options laws. Although money
laundering is not a violation of the laws enforced by the CFTC, it may be accomplished through acts
that separately violate these laws, such as wash sales, accommodation trades, fictitious transactions
and the filing of false reports, and therefore could result in a CFTC enforcement action.
7.
International Cooperation.
The United States agencies noted above principally involved in the war on crimes are
increasingly cooperating with agencies of other governments to further their joint interests in
criminal investigations. The principal initiative is the Financial Action Task Force (commonly
called FATF). FATF is inter-governmental body whose purpose is the development and
promotion of policies, both at national and international levels, to combat money laundering and
terrorist financing. FATF makes recommendations for counter-measures against terrorism and
money-laundering. FATF also conducts mutual evaluations of member countries to assess their
actions in support of fighting money laundering and terrorism.
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CH. 3 - SENTENCING, PLEAS AND RELATED ISSUES.

I.
Introduction.
Often indeed usually the key issue for defendants charged with federal crimes is how
much the sentence will be and how to mitigate the sentence. The strength of the Governments cases
plus systemic incentives force the overwhelming number of defendants to plead guilty. One judge
has thus noted that:
The Department [of Justice] is so addicted to plea bargaining to leverage its
law enforcement resources to an overwhelming conviction rate that the focus of our
entire criminal justice system has shifted far away from trials and juries and
adjudication to a massive system of sentence bargaining that is heavily rigged against
the accused citizen.574
The statistics confirm this conclusion guilty pleas are made in 97% of federal criminal cases,575
meaning that 3% of indictments go to trial.576 This phenomenon is true for tax crimes. The
Government and the judiciary have limited resources to devote to tax crimes. By picking only the
strongest cases and getting convictions in virtually all of the cases usually by plea the
Government gets the maximum bang for its enforcement buck. This process involving the symbiosis
between sentencing and pleading guilty must be thoroughly understood by practitioners in this area.
This gives some idea as to why DOJ is addicted to plea bargaining. Since it takes two to
tango in reaching a plea, we need also to understand the incentives to the defendants to plead.577
Certainly, the strength of the Governments case is the principal factor. Most of us who have
recommended to our clients that they take the plea that we negotiate with the Government have been
convinced in our own minds that the clients (i) are guilty, (ii) will be found guilty if they go to trial
and (iii) will get a materially better deal if they are convicted by plea rather than by jury verdict.
But there are dynamics at play other than guilt or innocence or the likelihood of a finding of guilt
that clients factor into their decisions as to whether to plead and lawyers factor into their
recommendations to clients.
574
United States v. Green, 346 F. Supp. 2d 259, 265 (D. Mass. 2004), cited in John W.
Keker, The Advent of the Vanishing Trial: Why Trials Matter, 29 Champion 32 (2005) (excellent
discussion of the phenomenon).
575
Lafler v. Cooper, ___ U.S. ___, ___ 132 S. Ct. 1376, 1388 (U.S. 2012).
576
See John W. Keker, The Advent of the Vanishing Trial: Why Trials Matter, 29
Champion 32 (2005).
577
See Kyle Graham, Crimes, Widgets, and Plea Bargaining: An Analysis of Charge
Content, Pleas and Trials, 100 Calif. L. Rev. 1572, 1579-1580 (2012) (discussing inter alia plea
bargaining and trials in tax cases) (discussing inter alia the market analogy to plea bargaining
associated with Judge Frank Easterbrook of the Seventh Circuit Court of Appeals.)
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I use a simple example. Assume the Government can allege against a tax shelter promoter
10 five year counts in an indictment of say, a fraudulent tax shelter marketed to 10 taxpayers and
that they collectively evaded $500 million in tax. Once you understand the discussion of the
Sentencing Guidelines below, you will understand that the promoter is theoretically subject to a
maximum sentence of 50 years (10 five-year counts which can be stacked as the jargon goes). The
Sentencing Guidelines will offer a range that may be somewhat below; for illustrative purposes, lets
just say now that, in consideration with all other factors, the maximum sentence in the range is 20
years. If the promoters attorney negotiates with the Government a plea to one count with the
remaining counts being dismissed, the sentence would be capped at 5 years. Should the promoter
take the plea even though (a) the promoter is not convinced that he or she had the required
willfulness to make him guilty of the crime and/or (b) the promoter, in consultation with his lawyer,
believes that there is a 50% chance that a jury will not find him guilty? Stated otherwise, can this
promoter afford to go to trial under those circumstances where the downside is such a large
sentence? Will the promoter be forced to plead and, in the process, come to believe that he is guilty
so that he can make the required mea culpa to permit the Court to accept the plea? Consider the
following:
So who cares if we are trying fewer cases? Well, for one, more defendants
would be acquitted or dismissed if more cases went to tria1, so those defendants
should care. In 1975, an article appeared in the Harvard Law Review titled. A
Statistical Analysis Of Guilty Plea Practices In The Federal Courts. The author,
Michael Finkelstein, asked the question what proportion of those who pleaded
guilty in the federal courts would not have been convicted if they had contested their
cases? He called that proportion the implicit rate of non-conviction. His
conclusion was astonishing.
The 69 percent implicit non-conviction rate for the marginal group means that
at least 1/3 of all defendants pleading guilty in [high rate of guilty plea] districts
would ultimately have escaped conviction if they had refused to consent.
Finkelstein found that most of these non-convictions would be dismissals,
dismissals at the instance of the prosecutor who found her case too weak to proceed.
But figure it out for yourself. As Yogi Berra said, you can observe a lot by just
looking.578
Considering this same phenomena, will some lawyers representing criminal defense counsel
be too timid in their recommendations to their charged clients because they are not sure they can
competently handle a criminal trial (because their experience in actually trying cases has been
limited by the system that forces most defendants to plead)? These are systemic and subtle issues
that cannot be addressed in any detail in a book of this nature, but I do encourage lawyers who are
representing clients in this arena to consider them in their practices.
578
John W. Keker, The Advent of the Vanishing Trial: Why Trials Matter, 29
Champion 32, 33 (2005).
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I turn now to the features of the system dealing with sentencing, pleas and related
considerations. I start with the sentencing provisions where the Sentencing Guidelines cover much,
but not all, of the landscape.
II.
Sentencing, Including the Sentencing Guidelines.

A.
The Sentencing Statute.
Section 3553 provides in pertinent part (emphasis supplied by author):

(a) Factors To Be Considered in Imposing a Sentence. - The court shall
impose a sentence sufficient, but not greater than necessary, to comply with the
purposes set forth in paragraph (2) of this subsection. The court, in determining the
particular sentence to be imposed, shall consider (1) the nature and circumstances of the offense and the history and
characteristics of the defendant;
(2) the need for the sentence imposed (A) to reflect the seriousness of the offense, to promote
respect for the law, and to provide just punishment for the offense;
(B) to afford adequate deterrence to criminal conduct;
(C) to protect the public from further crimes of the
defendant; and
(D) to provide the defendant with needed educational or
vocational training, medical care, or other correctional treatment in the most
effective manner;
(3) the kinds of sentences available;
(4) the kinds of sentence and the sentencing range established for (A) the applicable category of offense committed by the
applicable category of defendant as set forth in the guidelines issued by the
Sentencing Commission pursuant to section 994(a)(1) of title 28, United States
Code, and that are in effect on the date the defendant is sentenced; or
(B) in the case of a violation of probation or supervised
release, the applicable guidelines or policy statements issued by the Sentencing
Commission pursuant to section 994(a)(3) of title 28, United States Code;
(5) any pertinent policy statement issued by the Sentencing
Commission pursuant to 28 U.S.C. 994(a)(2) that is in effect on the date the
defendant is sentenced;
(6) the need to avoid unwarranted sentence disparities among
defendants with similar records who have been found guilty of similar conduct; and
(7) the need to provide restitution to any victims of the offense.
(b) Application of Guidelines in Imposing a Sentence. - The court shall
impose a sentence of the kind, and within the range, referred to in subsection (a)(4)
unless the court finds that there exists an aggravating or mitigating circumstance of
a kind, or to a degree, not adequately taken into consideration by the Sentencing
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Commission in formulating the guidelines that should result in a sentence different

from that described. In determining whether a circumstance was adequately taken
into consideration, the court shall consider only the sentencing guidelines, policy
statements, and official commentary of the Sentencing Commission. In the absence
of an applicable sentencing guideline, the court shall impose an appropriate sentence,
having due regard for the purposes set forth in subsection (a)(2). In the absence of
an applicable sentencing guideline in the case of an offense other than a petty
offense, the court shall also have due regard for the relationship of the sentence
imposed to sentences prescribed by guidelines applicable to similar offenses and
offenders, and to the applicable policy statements of the Sentencing Commission.
For present purposes, I ask you to focus on the bold-faced text. Please note the general
statement in 3553(a) that the sentence should be sufficient but not greater than necessary to
serve the purposes to be served as specified in 3553(a)(2). In meeting this standard, the Court is
directed in the other subparagraphs of 3553(a) to consider, among other things the Guidelines
promulgated by the Sentencing Commission. The Guidelines generated ranges for sentencing based
on the Sentencing Commissions consideration of the typical factors that should be considered for
sentencing. The goal was to bring some degree of uniformity to the sentencing process based on
these typical factors. Then, 3553(b) requires that court shall impose a sentence specified under
the Guidelines, thus textually appearing to make the Guidelines sentencing mandatory except where
a departure is justified by factors not adequately taken into consideration by the Guidelines. From
the inception of the Guidelines in the 1980s through 2005, courts had treated the Guidelines as
mandatory. In 2005, the Supreme Court held in United States v. Booker, 543 U.S. 220 (2005) that
the sentencing must be based on the 3553(a) factors and that the Guidelines are only advisory
i.e., the Guidelines must be considered but are not mandatory in imposing sentence. Effectively, the
Court read out of the statute 3553(b)s shall impose mandate for the Guidelines. A general
summary of the state of the law at the time of publication of this text is:
Booker and its sequels certainly changed the dynamics of criminal
sentencing. The Guidelines are no longer binding, and district judges can choose
sentences that differ from the Sentencing Commission's recommendations - provided
of course that they stay within the range set by the statutes of conviction. But this
system is not a blank check for arbitrary sentencing. Judges still must start out by
calculating the proper Guidelines range - a step so critical that a calculation error will
usually require resentencing. The reason for this is simple. Congress wants judges
to do their best to sentence similar defendants similarly. And starting with the
Guidelines' framework - which gives judges an idea of the sentences imposed on
equivalent offenders elsewhere - helps promote uniformity and fairness. But having
done that, judges can sentence inside or outside the advisory range, as long as they
stay within the statutory range and consider the sentencing factors arrayed in
3553(a) - factors that include the nature of the offense, the background of the
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defendant, the seriousness of the crime, the need to deter criminal conduct, and the
need to protect the public from further crimes by the defendant. 579
B.
Guidelines Introduction and Policies.
As noted, computation of the Sentencing Guidelines is still the threshold step in sentencing.
Accordingly, I address the Guidelines in detail in this section.
Sentencing Guidelines are authorized by the Sentencing Reform Act of 1984.580 The United
States Sentencing Commission (USSC) is directed to establish sentencing policies and practices
for the Federal criminal justice system.581 The USSC has done so in the Sentencing Guidelines
Manual. The following key policy decisions are reflected in the Guidelines.582
1.
Introduction.
Historically, the federal criminal statutes usually set the maximum sentence for a defined
crime.583 So long as not above the maximum sentence, prior to the Guidelines, federal judges had
virtually unreviewable discretion to determine a sentence anywhere between no incarceration and
the maximum sentence for the counts of conviction (e.g., if convicted of 2 felonies each having a
maximum incarceration period of 5 years the maximum sentence would be 10 years). There were
no standards to guide the judge in making the decision where within the range set by the counts of
conviction he or she should sentence. This resulted in great disparity in sentencing for similar
counts of conviction and underlying real conduct. Thus, in the tax area, similar counts of
conviction and similar underlying conduct might draw no or lighter incarceration in certain districts
579
United States v. Rodriguez, 630 F.3d 39, 41 (1st Cir. 2010) (case citations omitted),
decision as revised 1/6/2011.
580
Title II of the Comprehensive Crime Control Act of 1984, Pub. L. No. 98-473,
217(a), 98 Stat. 1837, 2017-34 (codified as amended at 18 U.S.C. 3551-3568 (1994), 28 U.S.C.
991-998 (1994)).
581
28 U.S.C. 991(b)(1).
582
Until recently, Chapter One, Section One, Part A, contained an introduction
explaining the key policy decisions reflected in the guidelines. The introduction was amended from
time to time as appropriate. The introduction was invaluable in understanding the guidelines. In
2003, as part of the Commissions implementation of the Prosecutorial Remedies and Other Tools
to end the Exploitation of Children Today Act of 2003 (the PROTECT Act, Public Law 10821),
the introduction was transferred to the Editorial Note at the end of the initial guideline ( 1A1.1).
The Commission encourages the review of this material for context and historical purposes. S.G.
1A1.1, Commentary, Application Note 1 and Editorial Text. We summarize in the text above, the
key policies included in the original introduction (as amended from time to time) and now in the
Editorial Note.
583
Statutes sometimes also set minimum sentences, but for our present discussion I
ignore minimum sentences because they are not relevant to the types of crimes upon which we
focus.
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or even within a district as among judges in that district. This phenomenon was perceived as unfair.
Moreover, there was no standard for relating sentences for one type of crime to another type of
crime. For example, although tax evasion and embezzlement might have a maximum five year
sentence, some judges might perceive the embezzlement as more serious than the tax evasion and
mete out sentencing accordingly. This too was perceived as unfair.
2.
Guideline Ranges; Departures; Variances.
The Sentencing Reform Act of 1984 (the Act) was enacted to address these and related
issues. The Act grants the Commission authority to establish Sentencing Guidelines (Guidelines)
to rationalize the federal sentencing process. The Guidelines provide sentencing factors that
establish ranges for sentencing and fines.
In establishing the sentencing factors and resulting sentencing ranges, the drafters of the
Guidelines made extensive studies of pre-Guideline sentencing in order to identify appropriate
factors and sentencing ranges. These ranges are often referred to as the heartland to guide the
judge in typical cases. Focusing just on the Guidelines, the judge may make findings during the
sentencing process (after guilt determination) and, based on the findings, determines a Guidelines
sentencing range. The judge has virtually unfettered discretion to sentence within the Guidelines
range determined by the findings.584 The judge may depart from the Guidelines sentencing range,
but must specify why the case presents atypical features not considered by the Commission in setting
the Guidelines range. (Departure is a term of art and refers to a process expressly authorized by the
Guidelines for a judge to sentence above or below the indicate Guidelines range.) A party
dissatisfied with a departure from the sentencing range may appeal, and the appellate court may
review the departure.
The sentencing ranges applicable in all except the atypical cases eliminated the wide
disparities in sentencing and set standards roughly relating the gravity of crimes. The sentencing
ranges are set forth in a Sentencing Table. The Sentencing Table is a grid where the axes (or
determinants) are the Offense Level and the Criminal History Category. If you will take a quick
look at the table, you will determine that the lower the Offense Level and the lower the Criminal
History, the better (lighter) the sentence will be. I discuss Offense Levels and Criminal History
below. My experience is that, in most financial crimes cases (such as tax and money laundering
crimes), the defendant has no criminal history, sentencing is determined solely by the Offense Level
unless the court decides to depart or use a Booker variance from the Guidelines based on nonGuidelines factors. Where there is a criminal history, of course, the sentencing range will go up as
in indicated in the Sentencing Table.
The Guidelines do provide for departures from the ranges thus established. As I discuss in
more detail below, the Guidelines permit departures to recognize a defendants cooperation with the
Government in developing cases against others and further permit departures in situations not
584
Given the purpose Guidelines ranges, one would expect that the mean and medium
sentences under the Guidelines would be roughly in the center of the ranges
- 281 -
adequately contemplated by the Guidelines. Departures are thus allowed by the Guidelines, and if
a judge departs from the indicated range under the Guidelines, that is still a Guidelines sentence.
As a result of Booker and its progeny, once the Guidelines ranges and any appropriate
departures are considered, the Court then may take into consideration the full range of factors under
3553(a) that may result is a variance from the Guidelines. (Variance is a term of art referring
to the process of varying from the Guidelines range as adjusted for departures.)
3.
Parole Abolished.
In order to promote honesty in sentencing, the Commission severely limited parole. The
sentence imposed is the sentence served, less up to approximately 15% for good behavior for
sentences in excess of one year.585
4.
Other Key Features of Sentencing.

a.
The PSR.
After conviction, the Probation Office conducts a detailed study of the considerations that
the sentencing judge should or may want to consider in sentencing and reports to the Court on its
study in a Presentence Investigation Report (PSR).586 During its investigation, the Probation
Offices principal sources are the prosecutor and the defendant, but the Probation Officer may
585
18 U.S.C. 3624(b). The Bureau of Prisons provides the formula by regulation, after
notice and comment. 28 C.F.R. 523.20(a); an oft-quoted paraphrase of the formula is contained
in White v. Scibana, 390 F.3d 997, 1000 (7th Cir. 2004), cert denied, White v. Hobart, 162 L. Ed.
2d 297, 545 U.S. 1116, 125 S. Ct. 2921, 2922 (2005). Whether the BOPs calculation is required
by the statute has been an issue of some controversy, turning on whether the credit is for the term
of the sentence or the time actually served. The BOP interpretation is the latter and most courts
sustain the BOP calculation on the notion that, even if the formula is not commanded by the
statutory language, it is a permissible interpretation of the statute, so that the BOP has agency
discretion under Chevron to choose a permissible interpretation. See e.g., Wright v. Fed. Bureau
of Prisons, 451 F.3d 1231 (10th Cir. Colo. 2006) (in the course of its reasoning, the Court rejects
the application of the rule of lenity to require the BOP to choose the more prisoner-friendly
interpretation). For Chevron afficionados, note that the majority in Wright found the statute
ambiguous, thus permitting Chevron deference to the reasonable interpretation chosen by BOP.
The concurring judge concluded that the statute was not ambiguous and found that the BOP
interpretation was commanded by the statute itself rather than a proper choice among reasonable
interpretations of an ambiguous statute. The Fifth Circuit has held consistently with the concurring
judge that the statute is not ambiguous. Moreland v. Fed. Bureau of Prisons, 431 F.3d 180 (5th Cir.
2005), cert. denied 547 U.S. 1106 (2006) (where the positions in Wright are reversed - 2 judges for
plain meaning of the statute (Chevron step 1), with the concurring judge for statute ambiguity with
reasonable agency interpretation (Chevron step 2)).
586
6A1.1.
- 282 -
develop and consider other sources. The PSR includes the factors under the Sentencing Guidelines
(such as, in the case of tax crimes, the tax loss involved, the defendants role, criminal history,
calculation of the Guidelines factors for sentencing, and making a recommendation to the Court.)
and factors relevant to the other factors under 3553(a).587 In the PSR, the Probation Office may
include recommendations as to appropriate departures on bases that it feels are not adequately dealt
with in the heartland sentencing range and may include recommendations as to variances. The PSR
is presented to the Government and the Defendant 35 days prior to sentencing for any objections
they desire to make to the Court.588 The sentencing judge then considers the PSR and any objections
made by the parties. The key point is that the PSR is the baseline of sentencing information that the
judge will have. The parties must consider opportunities during the Probation Offices investigation
and development of the PSR to shape the conclusions that are eventually included in the PSR. As
I will note, it is better to have the Probation Office adopt the desired conclusion as its
recommendation to the sentencing judge than to try to rebut the Probation Offices recommendation
at the sentencing hearing.
b.
Courts Sua Sponte Consideration of Departures.
Before the sentencing hearing, if the judge intends to depart from the Guidelines calculations
on a basis not identified in the PSR or the parties submissions, the judge must give the parties
reasonable notice that the judge is considering departing and the grounds therefor.589 Some courts
have held that this requirement of notice from the sentencing court is not required for Booker
variances (i.e., variances under 3553(a)), but some read the Supreme Courts opinion in Rita590 as
requiring such notice where the court will impose a variance 1) based on facts that amount to a
prejudicial surprise; 2) without considering a continuance; 3) where advance notice might have
affected the parties' presentations of evidence.591
c.
The Sentencing Hearing.
At the sentencing hearing (sometimes referred to as a Fatico hearing592), the sentencing judge
must verify that the defendant and defendants counsel have read and discussed the PSR, provide
the parties any information it will use for sentencing not contained in the PSR, permit the parties to
make appropriate comments and introduce evidence on objections, and, for good cause shown,
587
FRCrP Rule 32(c) (Probation Office investigation) and (d) (Probation Office
Presentence Report).
588
6A1.2; FRCrP Rule 32(e) (disclosure to parties) and 32(f) (Parties right to object
and procedure for doing so).
589
FRCrP Rule 32(h).
590
Rita v. United States, 551 U.S. 338 (2007).
591
United States v. Orlando, 553 F.3d 1234, 1237-38 (9th Cir. 2009), the Court held
cryptically and without citation of authority that a variance is not a departure requiring this
advance notice and sustained the sentencing without notice because the cited factors were not
present.
592
United States v. Fatico, 603 F.2d 1053 (2d Cir. 1979).
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consider new objections to the PSR not previously made.593 The judge may then accept the findings
of the PSR except as to unresolved objections.594 The judge resolves any factual or legal objections
to the PSR or other disputes relevant to sentencing.595 Thus, for example, a judge may not accept
a PSRs findings including the tax loss number (the principal determinant in tax crimes sentencing)
if the defendant has objected; rather the court must consider the objections and make specific
findings independent of the PSR.596
The judge resolves factual issues relevant to sentencing under a preponderance of the
evidence standard, not the beyond a reasonable doubt standard that applied in determining guilt at
the trial.597 Notwithstanding this general rule as to a preponderance burden of proof, from due
process concerns, the Ninth Circuit requires that the sentencing proof be clear and convincing as
to sentencing factors that have a disproportionate impact on the length of the sentence.598 The
rationale for the higher standard goes roughly as follows: The higher standard ensures that
legislatures cannot evade the constitutionally required standard of proof by reclassifying an element
of a crime as a sentencing factor, thereby depriving a defendant of important criminal procedural
protections.599 The totality of the circumstances and, apparently a keen intuition, inform the
sentencing court when this higher standard should apply, but the following are considerations in the
mix, but the considerations in the mix are:
Circumstances considered include (1) whether the enhanced sentence falls within the
maximum sentence for the crime alleged in the indictment; (2) whether the enhanced
sentence negates the presumption of innocence or the prosecution's burden of proof
for the crime alleged in the indictment; (3) whether the facts offered in support of the
enhancement create new offenses requiring separate punishment; (4) whether the
increase in sentence is based on the extent of a conspiracy; (5) whether an increase
in the number of offense levels is less than or equal to four; and (6) whether the
length of the enhanced sentence more than doubles the length of the sentence
authorized by the initial sentencing guideline range in a case where the defendant
would otherwise have received a relatively short sentence.600
593
FRCrP Rule 32(i)(1) & (2).

FRCrP Rule 32(i)(3)(A).
595
6A1.3(a); FRCrP Rule 32(i)(3)(B).
596
E.g. United States v. Gricco, 277 F.3d 339, 355 (3d Cir. 2002).
597
6A1.3, Commentary. In United States v. O'Brien, ___, U.S. ___, 130 S. Ct. 2169,
2174-5 (2010), the Supreme Court stated (citations omitted):
Elements of a crime must be charged in an indictment and proved to a jury beyond
a reasonable doubt. Sentencing factors, on the other hand, can be proved to a judge
at sentencing by a preponderance of the evidence.
598
United States v. Treadwell, 593 F.3d 990 (9th Cir. 2010).
599
Id., 1000.
600
Id., at 999.
594
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Further, the court may consider any evidence without regard to its admissibility under the
rules of evidence applicable at trial, provided that the information has sufficient indicia of reliability
to support its probable accuracy.601 Thus, for example:
Reliable hearsay evidence may be considered.602

Out-of-court declarations by an unidentified informant may be considered where
there is good cause for the non-disclosure of the informants identity and there is
sufficient corroboration by other means.603
Before the sentencing, the defendants counsel, the defendant and the prosecutor are afforded
an opportunity to speak.604 The judge then pronounces the sentence. Finally, the court must advise
the defendant of the right to appeal.605
5.
Conclusion to Introduction.
I have discussed in this section the general sentencing process and have mentioned some of
the Sentencing Guidelines factors brought to bear in the process. But, to understand the precise role
of the Sentencing Guidelines in the process, I now discuss the seismic shift brought about by a key
Supreme Court decision United States v. Booker, 543 U.S. 200 (2005).
C.
Power to the Judges the Booker Revolution in Sentencing.
The precise role of the Guidelines has evolved. As you note from the structure of the statute
( 3553(a), quoted above), the Guidelines appear to be mandatory. When first promulgated, many
scholars and judges complained loudly that the Guidelines improperly forced sentencing decisions
into set patterns rather than permitting sentencing judges to fashion sentences based on the unique
facts of the cases before them. The buzz word connected with this view of the Guidelines was that
they were mandatory and required sentencing by the numbers (a comment you will understand
later when we get into the details of the Guidelines). Judges who took seriously their duty to tailor
a sentence based on the unique facts bristled at the perceived straight-jacket of the Guidelines that
limited their ability to do justice in the particular cases before them. For many years, sentencing
courts labored under this view that the Guidelines were mandatory.
601
6A1.3(a).
6A1.3, Commentary. See also United States v. Martinez, 413 F.3d 239 (2d Cir.
2005) (holding that the Confrontation Clause does not apply to the sentencing hearing and collecting
the authority), cert. denied, 546 U.S. 1117 (2006). The holding may seem unexceptional but it did
reject the argument that Crawford and Booker may have changed the prior holdings to that effect.
603
Id.
604
605
FRCrP Rule 32(j). I should note that in most plea agreements, the defendant waives
his right to appeal except as to specifically excepted matters.
602
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Then, after many years of living with or tolerating mandatory Guidelines, in a remarkable
series of cases, the Supreme Court rejected the notion that the Guidelines were mandatory.
Although there were advance warnings, in 2005, in United States v. Booker, 543 U.S. 200 (2005),
the Court held unconstitutional the feature of the Guidelines that mandate or permit a sentence
beyond the range determined by facts found by the judge in the sentencing phase that were not found
by the jury in the conviction phase. The constitutional cure, the Supreme Court pronounced, was
to (a) make the sentencing judges determination of sentencing ranges based on such findings
advisory rather than mandatory (as the internal structure of 3553(a) discussed above indicates) and
(b) make appellate review of sentencing subject to a standard of whether it reasonably implements
the mandatory purposes of 3553(a)(2). Booker was, to put in mildly, a seismic shift in how
sentencing is done in the federal system, because it restored to sentencing judges much, if not all,
of the practical discretion they had prior to the implementation of the Guidelines in the 1980s.
Booker still requires judges to calculate properly the Guidelines ranges (so that the guidance
function of the nonmandatory Guidelines can serve that function properly), requires judges to
articulate why they were exercising their discretion (whether consistent with the Guidelines or not),
and subjected sentencing judges articulated rationales for sentencing to appellate review for abuse
of discretion.
In a major statement in December 2007 on Bookers effect on the role of the Guidelines, the
Court summarized:
[A] district court should begin all sentencing proceedings by correctly calculating the
applicable Guidelines range. As a matter of administration and to secure nationwide
consistency, the Guidelines should be the starting point and the initial benchmark.
The Guidelines are not the only consideration, however. Accordingly, after giving
both parties an opportunity to argue for whatever sentence they deem appropriate,
the district judge should then consider all of the 3553(a) factors to determine
whether they support the sentence requested by a party. In so doing, he may not
presume that the Guidelines range is reasonable. He must make an individualized
assessment based on the facts presented. If he decides that an outside-Guidelines
sentence is warranted, he must consider the extent of the deviation and ensure that
the justification is sufficiently compelling to support the degree of the variance. We
find it uncontroversial that a major departure should be supported by a more
significant justification than a minor one. After settling on the appropriate sentence,
he must adequately explain the chosen sentence to allow for meaningful appellate
review and to promote the perception of fair sentencing.
Regardless of whether the sentence imposed is inside or outside the
Guidelines range, the appellate court must review the sentence under an
abuse-of-discretion standard. It must first ensure that the district court committed
no significant procedural error, such as failing to calculate (or improperly
calculating) the Guidelines range, treating the Guidelines as mandatory, failing to
consider the 3553(a) factors, selecting a sentence based on clearly erroneous facts,
or failing to adequately explain the chosen sentence--including an explanation for
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any deviation from the Guidelines range. Assuming that the district court's
sentencing decision is procedurally sound, the appellate court should then consider
the substantive reasonableness of the sentence imposed under an abuse-of-discretion
standard. When conducting this review, the court will, of course, take into account
the totality of the circumstances, including the extent of any variance from the
Guidelines range. If the sentence is within the Guidelines range, the appellate court
may, but is not required to, apply a presumption of reasonableness.606 But if the
sentence is outside the Guidelines range, the court may not apply a presumption of
unreasonableness. It may consider the extent of the deviation, but must give due
deference to the district court's decision that the 3553(a) factors, on a whole, justify
the extent of the variance. The fact that the appellate court might reasonably have
concluded that a different sentence was appropriate is insufficient to justify reversal
of the district court.607
The Supreme Court recently reiterated this view that The Guidelines are not only not
mandatory; they are also not to be presumed reasonable at least they are not to be presumed by
the sentencing judge to be reasonable.608 Booker and its progeny make sentencing much more an
art than a science.609 Determining whether a sentence is unreasonable and thus reversible requires
the reviewing court to recognize that, given the sentencing factors the sentencing judge must
consider, the sentencing outcome is not a finite point with a single reasonable sentence but rather
a universe of reasonable sentences.610 Only at the extremes will a sentence be deemed unreasonable.
At this point, clarifying some of the terminology will avoid confusion. As I noted above, the
Guidelines do provide for departures and, when a judge exercises his authority under the Guidelines
to depart, that is a departure as the term used in the Sentencing Guidelines. The resulting sentence
is still a Guidelines sentence. However, where, pursuant to Booker, a judge exercises his authority
under 3553(a) to give a sentence not otherwise within the Guidelines (including Guidelines
departures), that is a variance. Use of this terminology will help separate the different concepts
which might otherwise be blurred.
606
[This footnote is not in the case and is inserted by the author of this book for clarity.]
The presumption as to the reasonableness of a within Guidelines sentence may be applied by the
appellate court in reviewing a within Guidelines sentence. The presumption does not apply when
the sentencing court imposes the sentence. See United States v. Marston, 517 F.3d 996, 1005
(2008); and United States v. Carty, 520 F.3d 984, 991 (9th Cir. 2008) (en banc) (citing Rita v. United
States, 551 U.S. 338 (2007).).
607
Gall v. United States, 552 U.S. 38 (2007) (citations omitted); for further elucidation
on the role of the Guidelines, see also the companion case of Kimbrough v. United States, 551 U.S.
338 (2007). For a bullet-point statement of the current post Gall-Kimbrough steps required for
sentencing, see United States v. Carty, 520 F.3d 984, 991-993 (9th Cir. 2008) (en banc) (citing Rita).
608
United States v. Nelson, 555 U.S. 350 (2009).
609
United States v. Clogstron, 662 F.3d 588, 593 (1st Cir. 2011).
610
United States v. Clogstrom, 662 F.3d 588, 592 (1st Cir. 2011).
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So, Booker and its progeny affect is a narrow band of cases in which the sentencing judge
cant impose the sentence he desires within the traditional Guideline analysis. In the overwhelming
number of cases, the judge can get the sentence he or she desires within the Guidelines, and that will
be the end of it because the Guidelines usually consider appropriately the sentencing factors in all
except very atypical cases. Booker gives the judge the discretion to go outside the Guidelines, and
vary the sentence significantly. A recent case611 illustrates: The Guidelines sentence for two
defendants indicated 87 to 108 months incarceration. Instead the sentencing judge sentenced them
to six months home monitoring, three years probation, and 1,000 hours of community service. The
Court of Appeals affirmed based on Booker, albeit noting that the degree of variance gave the panel
pause. Such cases are necessarily fact-specific, but this type of sentence which would not have
passed muster pre-Booker, now can pass muster under Booker.
I conclude this discussion with a good case illustrating why Booker got it right in releasing
judges, in appropriate cases from the strictures of the Guidelines. In United States v. Adelson, 441
F.Supp.2d 506 (S.D.N.Y. 2006), the court was faced with sentencing in an accounting fraud case
involving a public company. The Guidelines, based on the loss related to public company stock
indicated sentencing for life. Limited by DOJ Tax policy that permitted the prosecutor to agree to
any sentence less than the Guidelines, the prosecutor suggested perhaps a sentence of 85 years which
would, in effect, be a life sentence. But, the court in several colloquies extracted from the prosecutor
statements that indicated little enthusiasm for the chains seemingly imposed by the Guidelines. The
Court said (pp. 511, 515):
Even the Government blinked at this barbarity. Pressed repeatedly by the
Court as to whether he was asking for a guideline sentence (which, under the Justice
Department's prevailing policy he was obligated to do), Government counsel refused
to answer the question directly.
[The Court gives an example of a colloquy with the prosecutor]
On any fair reading of this and similar colloquies throughout the sentencing
hearing, it is patent that the Government was asking the Court not to impose a
guideline sentence or, indeed, a sentence of anything like 85 years. What this
exposed, more broadly, was the utter travesty of justice that sometimes results from
the guidelines' fetish with abstract arithmetic, as well as the harm that guideline
calculations can visit on human beings if not cabined by common sense.
The Government was therefore right to ultimately suggest, as indicated
above, that the Court fashion a sentence that, while taking some account of the
guidelines, focuses more on the statutory factors set forth in 18 U.S.C. 3553(a).
[citing Booker.]
****
611
United States v. Prosperi, 686 F.3d 32 (1st Cir. 2012),
- 288 -
To put this matter in broad perspective, it is obvious that sentencing is the

most sensitive, and difficult, task that any judge is called upon to undertake. Where
the Sentencing Guidelines provide reasonable guidance, they are of considerable
help to any judge in fashioning a sentence that is fair, just, and reasonable. But
where, as here, the calculations under the guidelines have so run amok that they are
patently absurd on their face, a Court is forced to place greater reliance on the more
general considerations set forth in section 3553(a), as carefully applied to the
particular circumstances of the case and of the human being who will bear the
consequences.
D.
The Guidelines An Overview of the Process.
I noted above that Booker requires that, as the first step in the sentencing process, the
Guidelines calculations be made so that they can serve their post-Booker role of guiding the Judge
in coming to a sentence. The judge is not required to slavishly follow the Guidelines, but he must
consider them. Hence, we look more closely at the Guidelines process and calculations.
I covered above the policies that are reflected in the Guidelines. Now I provide you an
overview of the actual application of the Guidelines. This is drawn, with my own variations from
a document from the Sentencing Commission Web Site titled An Overview of the Sentencing
Guidelines.
HOW THE SENTENCING GUIDELINES WORK
Offense Seriousness
The sentencing guidelines provide 43 levels of offense seriousness the more serious the
crime, the higher the offense level. The level is determined by deriving a Base Offense Level and
then making adjustments to the Base Offense Level for certain Specific Offense Characteristics,
Multiple Count Adjustments and Criminal History. The adjustments can increase or reduce the Base
Offense Level in deriving the final Sentencing Guideline level.
Base Offense Level
Each type of crime is first assigned a Base Offense Level, which is the starting point for
determining the seriousness of a particular offense. More serious crimes have higher Base Offense
Levels (for example, a trespass has a base offense level of 4, while kidnapping has a base offense
level of 24). Base Offense Levels for financial crimes (such as tax and money laundering) are
incremental based upon incremental dollar amounts attributable to the crime. For tax crimes, the
Base Offense level is determined by the Tax Loss Table which is based upon the tax loss the
amount of tax the taxpayer sought to avoid by the illegal conduct.612 The tax Base Offense level is
a minimum of 6 for a tax loss of $2,000 or less and steps up incrementally to 36 for tax loss above
612
The Tax Loss table is at S.G. 2T4.1.
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$400,000,000.613 (As noted above, the Guidelines go up to 43, but at least in the initial round of
setting the Base Offense Level, tax crimes do not draw in excess of 36.)
Specific Offense Characteristics
The Base Offense Level may then be adjusted upward for certain Specific Offense
Characteristics. These characteristics depend upon the nature of the underlying crime. The tax
specific offense characteristics that add 2 levels each are: (i) failure to report illegal income and (ii)
sophisticated means to commit the crime.614
Adjustments
Adjustments are factors that can apply to any offense. The adjustments increase or decrease
the Base Offense Level (as adjusted for Specific Offense Characteristics). For nontax financial
crimes, for example, there might be upward adjustments for victim related damage from the conduct
being punished. In tax crimes, there is no victim per se, so victim-related adjustments are not in
play. The following type of adjustments may, however, be in play in tax crimes:
role in the offense upward adjustments if the defendant acted as organizer or

promoter of others involved in the illegal scheme.615
abuse of a position of trust or use of special skill616
obstructing justice.617
Multiple Count Adjustments
Up to this point we have considered only a single count of conviction in explaining how the
Guidelines work. Where, however, there is more than a single count of conviction, the sentencing
guidelines provide a combined offense level.618 These rules provide incremental punishment for
significant additional criminal conduct. Multiple counts of conviction that are sufficiently alike will
be grouped in determining the sentence. For example, in tax cases where the counts of conviction
are all tax crimes, the counts are grouped and the only effect of multiple counts of conviction is
that the tax loss for the multiple counts is used to determine the Base Offense Level. In other words,
if the defendant has a tax loss of $100,000, his Base Level Offense will not be adjusted regardless
of whether a single count is involved or multiple counts are involved. For disparate counts of
conviction (e.g., embezzlement and tax crime for failure to report and pay tax on the embezzled
income), separate calculations of the Guideline level are made for each count, the highest level is
613
614
615
616
617
618
S.G. 2T1.1. and 2T4.1 (Tax Table).

S.G. 2T1.1(b).
S.G. 3B1.1.
S.G. 3B1.3.
S.G. 3C1.1.
S.G. Ch. 3, Part D.
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then used, and increases are made based upon the other counts. Essentially, grouping is a good thing
and is commonly encountered in tax convictions.
Acceptance of Responsibility Adjustments
The final step in determining an offenders offense level involves the offenders acceptance
of responsibility. The judge may decrease the offense level by two or three levels if, in the judges
opinion, the offender accepted responsibility for his offense.619 In deciding whether to grant this
deduction, judges can consider such factors as admission of his or her role (such as by plea of guilty)
and restitution.
Criminal History
The Guidelines assign each offender to one of six criminal history categories based upon the
extent of an offenders past misconduct and how recently these crimes took place. Criminal History
Category I is assigned to the least serious criminal record and includes many first-time offenders.
Most tax crimes will involve Criminal History I, so that the offense level determined under the
foregoing steps are the only factors in sentencing.
Determining the Guideline Range
The adjusted Offense Level and Criminal History are then applied to a grid, called the
Sentencing Table, in Chapter 5 of the Guidelines. The point at which the final Offense Level and
the criminal history category intersect on the Sentencing Table determines the defendants
sentencing guideline range.
In the following excerpt from the Sentencing Table, a convicted defendant with a Criminal
History Category of I and a final offense level of 20 would have a Guideline range of 33 to 41
months. (See table excerpt.)
SENTENCING TABLE (excerpt)
(in months of imprisonment)
Criminal History Category
Offense
I
II
III
Level
.. ... ... ... ... ...
19
30-37 33-41 37-46
20
33-41 37-46 41-51
21
37-46 41-51 46-57
... ... ... ... ... ...
619
IV
VI
46-57 57-71 63-78

51-63 63-78 70-87
57-71 70-87 77-96
S.G. 3E1.1.
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Sentencing Options
In addition to providing a Guideline range, there are a series of rules that determine the
availability of non-imprisonment sentencing options for offenders. For example, if the applicable
guideline range is 0-6 months, the judge has a number of options, including a guideline sentence of
probation only, or a sentence of up to six months imprisonment.620
Departures
After the guideline range is determined, if the court determines that there is a factor that the
guidelines did not adequately consider, it may depart from the guideline range.621 That is, the
judge may sentence the offender above or below the range. When departing, the judge states the
reason for the departure. If the sentence is an upward departure, the offender may appeal the
sentence; if it is a downward departure, the government may appeal. One special kind of departure
is the substantial assistance departure.622 This downward departure may be granted if the offender
has provided substantial assistance in the investigation or prosecution of another offender. A motion
to depart for substantial assistance must be made by the prosecution, but it is the judge who decides
whether to grant it and, if so, to what extent.
E.
Guidelines in Tax Cases - A Simple Example.

1.
Introduction.
I present a simple example, following the format for the Guidelines to show you how they
work in a tax setting.
Example: The taxpayer has been convicted on one count of tax evasion for one year, the 01
tax year, with the return being filed on 4/15/02).623 In that return, the taxpayer fraudulently omitted
an item of income of $250,000 from a legal source, resulting in a tax underpayment of $85,000. I
assume that these are the criminal numbers -- and for present purposes also the tax loss numbers
which means that they are the taxes on the components of income or deduction that result from
evasion. The evasion was simple, garden-variety evasion, with no evasive or sophisticated
measures to hide the omitted income or implement the evasion, such as using fictitious names,
offshore accounts, etc.
The first step in the application of the Sentencing Guidelines is to determine the offense
conduct and the Base Offense Level that is determined by the offense conduct.
620
S.G. Chapter 5, Part B.

S.G. Chapter 5, Part K.
622
S.G. 5K1.1.
623
I choose this year in order to use the 2001 Sentencing Guidelines which generally
establish higher Base Offense Levels for tax loss numbers than under the prior Guidelines.
621
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2.
Applicable Offense Guideline.
Chapter 2 of the Guidelines is the starting point. Chapter 2 determines the offense conduct
and lists the various federal offenses and statutory provisions. Tax crimes are addressed in Part T
of Chapter 2. Tax crimes for this purpose may be divided analytically into two parts: (1) the crime
itself and (2) the amount of tax that was the object of the crime. Both of these parts are addressed
in Part T. The following are the relevant provisions of Part T to example:
Introductory Commentary
The criminal tax laws are designed to protect the public interest in preserving
the integrity of the nations tax system. Criminal tax prosecutions serve to punish
the violator and promote respect for the tax laws. Because of the limited number of
criminal tax prosecutions relative to the estimated incidence of such violations,
deterring others from violating the tax laws is a primary consideration underlying
these guidelines. Recognition that the sentence for a criminal tax case will be
commensurate with the gravity of the offense should act as a deterrent to would-be
violators.
2T1.1. Tax Evasion; Willful Failure to File Return, Supply Information, or Pay Tax;
Fraudulent or False Returns, Statements, or Other Documents
(a) Base Offense Level:
(1) Level from 2T4.1 (Tax Table) corresponding to the tax loss; or
(2) 6, if there is no tax loss.
(b) Specific Offense Characteristics
(1) If the defendant failed to report or to correctly identify the source
of income exceeding $10,000 in any year from criminal activity, increase by 2 levels.
If the resulting offense level is less than level 12, increase to level 12.
(2) If the offense involved sophisticated means, increase by 2 levels.
If the resulting offense level is less than level 12, increase to level 12.
(c) Special Instructions. For the purposes of this guideline -(1) If the offense involved tax evasion or a fraudulent or false return,
statement, or other document, the tax loss is the total amount of loss that was the
object of the offense (i.e., the loss that would have resulted had the offense been
successfully completed).
Notes:
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(A)If the offense involved filing a tax return in which gross

income was underreported, the tax loss shall be treated as
equal to 28% of the unreported gross income (34% if the
taxpayer is a corporation) plus 100% of any false credits
claimed against tax, unless a more accurate determination of
the tax loss can be made.
(B)If the offense involved improperly claiming a deduction
or an exemption, the tax loss shall be treated as equal to 28%
of the amount of the improperly claimed deduction or
exemption (34% if the taxpayer is a corporation) plus 100%
of any false credits claimed against tax, unless a more
accurate determination of the tax loss can be made.
(C)If the offense involved improperly claiming a deduction
to provide a basis for tax evasion in the future, the tax loss
shall be treated as equal to 28% of the amount of the
improperly claimed deduction (34% if the taxpayer is a
corporation) plus 100% of any false credits claimed against
tax, unless a more accurate determination of the tax loss can
be made.
(D)If the offense involved (i) conduct described in
subdivision (A), (B), or (C) of these Notes; and (ii) both
individual and corporate tax returns, the tax loss is the
aggregate tax loss from the offenses added together.
(2)If the offense involved failure to file a tax return, the tax loss is the
amount of tax that the taxpayer owed and did not pay.
Notes:
(A)If the offense involved failure to file a tax return, the tax
loss shall be treated as equal to 20% of the gross income
(25% if the taxpayer is a corporation) less any tax withheld or
otherwise paid, unless a more accurate determination of the
tax loss can be made.
(B)If the offense involved (i) conduct described in
subdivision (A) of these Notes; and (ii) both individual and
corporate tax returns, the tax loss is the aggregate tax loss
from the offenses added together.
(3)If the offense involved willful failure to pay tax, the tax loss is the amount
of tax that the taxpayer owed and did not pay.
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(4)If the offense involved improperly claiming a refund to which the claimant
was not entitled, the tax loss is the amount of the claimed refund to which the
claimant was not entitled.
(5)The tax loss is not reduced by any payment of the tax subsequent to the
commission of the offense.
* * * *
Application Notes
1."Tax loss" is defined in subsection (c). The tax loss does not include
interest or penalties, except in willful evasion of payment cases under 26
U.S.C. 7201 and willful failure to pay cases under 26 U.S.C. 7203.
Although the definition of tax loss corresponds to what is commonly called
the criminal figures, its amount is to be determined by the same rules
applicable in determining any other sentencing factor. In some instances,
such as when indirect methods of proof are used, the amount of the tax loss
may be uncertain; the guidelines contemplate that the court will simply make
a reasonable estimate based on the available facts.
Notes under subsections (c)(1) and (c)(2) address certain situations in income
tax cases in which the tax loss may not be reasonably ascertainable. In these
situations, the "presumptions" set forth are to be used unless the government
or defense provides sufficient information for a more accurate assessment of
the tax loss. In cases involving other types of taxes, the presumptions in the
notes under subsections (c)(1) and (c)(2) do not apply.
Example 1: A defendant files a tax return reporting income of $40,000 when
his income was actually $90,000. Under Note (A) to subsection (c)(1), the tax
loss is treated as $14,000 ($90,000 of actual gross income minus $40,000 of
reported gross income = $50,000 x 28%) unless sufficient information is
available to make a more accurate assessment of the tax loss.
****
In determining the tax loss attributable to the offense, the court should use as
many methods set forth in subsection (c) and this commentary as are
necessary given the circumstances of the particular case. If none of the
methods of determining the tax loss set forth fit the circumstances of the
particular case, the court should use any method of determining the tax loss
that appears appropriate to reasonably calculate the loss that would have
resulted had the offense been successfully completed.
****
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Background. This guideline relies most heavily on the amount of loss that
was the object of the offense. Tax offenses, in and of themselves, are serious
offenses; however, a greater tax loss is obviously more harmful to the
treasury and more serious than a smaller one with otherwise similar
characteristics. Furthermore, as the potential benefit from the offense
increases, the sanction necessary to deter also increases.
The starting point is thus the Base Offense Level, for which we are referred to the tax loss
table in 2T4.1. In our example ($85,000 of tax loss), the tax loss table provides a Base Offense
Level of 16. This is 10 levels up from the Base Offense Level that would apply if there were no tax
loss at all (e.g., as in the case of a false return conviction under 7206(1) where the taxpayer had
paid all of the tax but had misrepresented a source).
We then go to the Specific Offense Characteristics in 2T1.1(b). Since legal income is
involved, the (b)(1) adjustment does not apply. The other adjustment (the (b)(2) adjustment) is for
sophisticated means. The example provides that no sophisticated means was involved.
3.
Adjustments.
Guidelines Chapter 3 next allows adjustments to the offense level. There are victim related
adjustments (upward), role in the offense (leader, minimal participant) adjustments (upward or
downward), obstruction of justice adjustments (upward), multiple counts adjustments (upward in
some cases), and acceptance of responsibility adjustments (downward adjustment). These are the
types of matters judges considered before the Guidelines in determining appropriate sentences.
The adjustment relevant in our example is a 3 level reduction [i]f the defendant clearly
demonstrates acceptance of responsibility for his offense and timely notifies the Government of his
intent to plea so that the Government avoids the burden of preparing for trial.624 You are
comfortable that your client has accepted responsibility and will qualify for this benefit if he agrees
to plead guilty. But he still wants to know what his sentencing range is. A plea qualifying for this
adjustment would reduce the offense level by 3. Now your client is at level 13.
4.
Criminal History or Livelihood.
Chapter Four then provides for upward adjustments on the sentencing table for significant
criminal history. In this case, the defendant has none, so we will move on.
5.
Application of the Sentencing Table.
The final step is to apply the adjusted offense level, which is now 13, to the sentencing table
contained in Chapter 5, Part A. You should easily derive a sentencing range of 12-18 months.
624
S.G. 3E1.1. Note that the 3 level reduction, rather than the 2 level reduction, applies
if the Offense Level prior to this adjustment is 16 or greater, which is the case here.
- 296 -
Notice how key the starting point the Base Offense Level is to the process. In tax cases,
the Base Offense Level is determined by the tax loss number. In this example, the tax loss number
is $85,000 which drives the Base Offense Level (prior to adjustments) to 16 and the sole adjustment
is for acceptance of responsibility driving the offense level to 13. But, for example, if you can drive
the tax loss number down a mere $5,000 to $80,000, the process produces a sentencing range of 1016 months and the same fine range.625 Note correspondingly, however, that if the tax loss number
were $200,000, you would still be in the same Guideline range and you would have a long way to
reduce the magic tax loss number of $80,000. (But to turn that thought, the Government would only
have a short way to go to ratchet your client into the next higher level, producing a sentencing range
of 18-24 months.)
6.
Probation and Supervised Release.
Probation is a sentence imposed as a substitute for incarceration. Supervised release is a

sentence imposed after incarceration.
In each zone from the sentencing table, the judge can order actual imprisonment. However,
some zones permit something less than imprisonment, as follows (5B1.1 and 5C1.1):
Zone A - No imprisonment required; probation is authorized.
Zone B - In discretion of judge, minimum term may be served by
imprisonment, imprisonment for at least one month along with community
confinement or home detention; or a sentence of probation with condition of
intermittent confinement, community confinement, or home detention.
Zone C - At least one-half indicated time must be by actual imprisonment and
balance may, in discretion of judge, include supervised release with community
confinement or home detention.
Under the sentencing table, the defendant is in Zone D and thus not eligible for probation
or supervised release. Note, however, that if you can drive the tax loss down to $80,000, the Base
Offense Level would be 14 and, with the 2 level reduction for acceptance of responsibility, the final
Offense Level would be 12 which would be in Zone C. Thus, the reduced tax loss would not only
produce a materially lesser sentencing range, it would permit some portion of it to be served in
community confinement or home detention.
7.
Sentencing Within or Without the Range.
The resulting Guidelines range will be the heartland for sentencing. Generally speaking,
the judge will have discretion where to sentence within this heartland range. However, under the
625
The Base Offense Level is 14, but the adjustment for acceptance of responsibility is
2 rather than three.
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Guidelines, the judge may depart from the indicated heartland range based on factors identified in
the Guidelines, including a judges discretion to depart on the basis for factors not adequately
addressed in the Guidelines.626 Keep in mind that we are now talking only about departures allowed
in the Guidelines.
8.
Fines and Restitution.
The Guidelines also provide a table for a heartland fine range. In the example, that table puts
the fine range at $3,000 through $30,000. 627
Fines are mandatory unless the defendant establishes that he is unable to pay and is not
likely to become able to pay.628 Fines also are subject to downward and upward departures.629
The statutes and Guidelines also allow restitution where restitution is otherwise provided by
statute, but there is no provision for restitution in tax cases. Of course, after the criminal case is
wrapped up, the taxpayer will have a form of restitution via the civil tax assessments (including
penalties and interest) that the IRS will make. I defer further consideration of restitution and fines
until later.630
9.
Section 3553(a) - Booker and Its Progeny.
After considering the foregoing advisory Guidelines determinations for the specific
defendant, the Court will consider any other factors it deems relevant to sentencing under 3553(a).
These can include any of the factors that a court could or would have considered prior to the
Guidelines. The sentencing judge now has substantial discretion to sentence as he or she sees fit
based on the individual circumstances of the defendant, without being reversed on appeal. This wide
discretion is captured in the following appellate approval of a variance to 24 months incarceration
despite an indicated Guidelines range of 87 to 108 months:
In sum, the sentencing judge's articulated reasons for the variance from the
advisory guidelines range assure us that the sentencing process was a reasoned one.
The court's justifications are sufficient to explain the extent of the variance from the
advisory guidelines range. The Government's arguments that the sentence is
unreasonable give too little effect to the congressional command that a sentencing
court impose a sentence sufficient, but not greater than necessary, to comply with
section 3553(a)(2). The issue here is whether, as it pertains to this defendant and the
offenses she committed, the sentence comports with the purposes of section
626
627
628
629
S.G. Chapter 5, Park K.

S.G. 5E1.2.
5E1.2(a).
See, e.g., United States v. Hunerlach, 258 F.3d 1282 (11th cir. 2001) (upward
departure).
630
See discussion beginning at p. 353.
- 298 -
3553(a)(2)(A). In imposing the 24-month sentence, the district court stressed

repeatedly the seriousness of Ms. Carter's offense and considered her as an individual
entitled to an individualized sentence. It concluded that Ms. Carter's individual
characteristics warranted a sentence significantly below the advisory guidelines
range. We cannot say that the court abused its discretion when it concluded that this
sentence reasonably reflects the seriousness of the offense, promotes respect for the
law and provides just punishment for the offense. The record makes clear that the
district court did not select the sentence arbitrarily, base the sentence on
impermissible factors, fail to consider pertinent section 3553(a) factors or give an
unreasonable amount of weight to any pertinent factor. Its explanation for its
sentence was sufficient to allow for meaningful appellate review and to promote the
perception of fair sentencing and its reasoning adequately justified the extent of the
variance from the advisory guidelines range. We might have adhered to the
guidelines or imposed a somewhat harsher sentence had we been sitting as district
judges. Our review is not de novo, however. Our authority is simply to determine
if the sentence is legal and, in the circumstances of the case, reasonable in light of
the statutory mandate contained in 18 U.S.C. 3553(a). Given those limitations on
our authority, the sentence of the district court must stand.631
Similarly, in a much more controversial variance, the Third Circuit recently in an en banc opinion,
affirmed a significant variance on the ground that the court could not determine that the variance
was unreasonable.632 Indeed, the majority opinion noted that the issue is not what sentence the court
of appeals thinks is reasonable or the one that it would impose if it were making the sentencing
decision; in this regard, the majority noted that a significant number of us, if we were sitting as the
district judge, might have applied the 3553(a) factors differently. But, the sentencing judge had
not abused his discretion. A good take away quote from this case is that the record demonstrates
the District Court's thoughtful attempt to tailor the off-the-rack Guidelines recommendations into
a sentence that fits [the defendant] personally.633
10.
Conclusion.
This is a very simple example as applied to a relatively straightforward tax case. The
adjustments and considerations that can influence where on the table the taxpayer fits are many and
must be specially considered in the context of specific cases. I deal with some of the more
frequently encountered considerations in the next portion of these materials.
631
United States v. Carter, 438 F.3d 784, 797 (7th Cir. 2008) (case and some statute
citations omitted).
632
United States v. Tomko, 562 F.3d 558 (3d Cir. 2009) (en banc).
633
Id., p. 575.
- 299 -
F.
Some Issues in Sentencing Relevant to Criminal Tax Cases.

1.
The Tax System in the Sentencing Equation.
I have introduced you to the role of the intended financial loss as the key determinant for
sentencing in financial crimes. A tax crime is a financial crime and thus the tax loss plays the major
role in sentencing. I will discuss some features of the tax loss determination below. In addition to
the tax loss, however, the Guidelines recognize the imperative that sentencing for tax crimes is a key
feature of the tax system to promote compliance by example. Consider the following from a recent
case:
As the government notes, the policy statements issued by the Sentencing
Commission make it clear that the Commission views tax evasion as a serious crime
and believes that, under the pre-Guidelines practice, too many probationary
sentences were imposed for tax crimes. See U.S.S.G. Ch. 1, Pt. A, introductory cmt.
4(d) (1998) (Under pre-guidelines sentencing practice, courts sentenced to
probation an inappropriately high percentage of offenders guilty of certain economic
crimes, such as theft, tax evasion, antitrust offenses, insider trading, fraud, and
embezzlement, that in the Commission's view are serious.). The policy statements
also reflect the Commission's view that general deterrence -- that is, deterring those
other than the defendant from committing the crime -- should be a primary
consideration when sentencing in tax cases. As the Commission has explained,
The criminal tax laws are designed to protect the public interest in preserving
the integrity of the nation's tax system. Criminal tax prosecutions serve to
punish the violator and promote respect for the tax laws. Because of the
limited number of criminal tax prosecutions relative to the estimated
incidence of such violations, deterring others from violating the tax laws is
a primary consideration underlying these guidelines. Recognition that the
sentence for a criminal tax case will be commensurate with the gravity of the
offense should act as a deterrent to would-be violators.
U.S.S.G. Ch. 2, Pt. T, introductory cmt. (1998). The policy statements likewise make
it clear that the Commission believes that there must be a real risk of actual
incarceration for the Guidelines to have a significant deterrent effect in tax evasion
cases. The Guidelines therefore
classify as serious many offenses for which probation was frequently given
and provide for at least a short period of imprisonment in such cases. The
Commission concluded that the definite prospect of prison, even though the
term may be short, will serve as a significant deterrent, particularly when
compared with pre-guidelines practice where probation, not prison, was the
norm.
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Id. at Ch. 1, Pt. A, introductory cmt. 4(d) (1998) (emphasis added). Given the nature
and number of tax evasion offenses as compared to the relatively infrequent
prosecution of those offenses, we believe that the Commission's focus on
incarceration as a means of third-party deterrence is wise. The vast majority of such
crimes go unpunished, if not undetected. Without a real possibility of imprisonment,
there would be little incentive for a wavering would-be evader to choose the
straight-and-narrow over the wayward path.
The district court, however, made no mention of these specific policy
statements, nor did the court more broadly acknowledge the general principles
underlying the Guidelines' approach to sentencing for serious economic crimes like
tax evasion. The only statements made by the district court touching on these areas
seem to suggest that the district court fundamentally disagreed with the Guidelines'
approach in these cases. The court mentioned the seriousness of the offense only to
chastise the government for remaining firm in its view that a term of imprisonment
was warranted, see J.A. 63, and the court seemed to effectively reject any need for
third-party deterrence with its statement that [a]nything at all that happens to make
him pay money affords some deterrence to criminal conduct, J.A. 63 (emphasis
added).
We recognize that in the post-Booker sentencing world, district courts must
give due consideration to relevant policy statements, but those policy statements are
no more binding than any other part of the Guidelines. Accordingly, district courts
may vary from Guidelines ranges based solely on policy considerations, including
disagreements with the Guidelines. United States v. Kimbrough, 552 U.S. 85, 101
(2007) (internal quotation marks and alteration omitted). Nonetheless, when a
non-Guidelines sentence runs directly counter to the Commission's position, either
because the district court has erroneously applied the departure provisions or because
it has determined in a mine-run case that the Guidelines range fails to reflect the
3553(a) factors, closer review may be in order. Evans, 526 F.3d at 165 n.4
(quoting Kimbrough, 552 U.S. at 109). If closer review of a district court's policy
disagreement is ever warranted, we believe it would be appropriate in this case.
Nonetheless, given the facts of the case and the degree of the variance, we find the
record insufficient to permit even the routine review for procedural reasonableness
required in cases involving an outside-the-Guidelines sentence. See Gall, 552 U.S.
at 50 (explaining that if the sentencing judge decides that an outside-Guidelines
sentence is warranted, he must consider the extent of the deviation and ensure that
the justification is sufficiently compelling to support the degree of the variance. We
find it uncontroversial that a major departure should be supported by a more
significant justification than a minor one.); cf. Rita, 551 U.S. at 356-57 ([W]hen
a judge decides simply to apply the Guidelines to a particular case, doing so will not
necessarily require lengthy explanation.).
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This case is a mine-run tax-evasion case only in the most generous (to
Engle) understanding of that phrase. Engle evaded his tax responsibilities for sixteen
years, altered tax returns prepared by his accountants, directed that income to him
be paid to shell corporations in an effort to avoid withholding and reporting
requirements, and lied to the IRS about the existence of these corporate accounts.
Yet, with facts that could perhaps be viewed as warranting an above-Guidelines
sentence, the district court imposed a significantly below-Guidelines sentence, based
on views that are at odds with the clearly expressed policy views of the Sentencing
Commission. The district court did not acknowledge the policy statements, and there
is nothing in the statements made by the court during sentencing that offer any
insight into why the court believed that a prison term was not required. There is no
explanation of why the court believed that allowing Engle to continue to work and
travel was consistent with the seriousness of his offense or that it would provide
adequate deterrence for other would-be tax evaders. Moreover, as noted above, for
more than four years after pleading guilty to tax evasion, Engle continued to work
and travel, yet he paid nothing towards his tax debt. It was not until two weeks
before the second sentencing hearing that Engle made the first payment (of less than
$ 500), and even that nominal payment was spurred on by an inquiry from the IRS.
The absence of any payments during a time when there is the greatest incentive for
a defendant to be on his best behavior raises questions about the district court's belief
that restitution would provide sufficient deterrence to Engle himself.
Under these circumstances, we cannot determine whether the sentence is
reasonable without a fuller explanation of the reasoning behind the district court's
view that a term of imprisonment as recommended by the Guidelines was not
warranted and why restitution alone would provide adequate deterrence in this case.
See Gall, 552 U.S. at 50 (noting that district court must make an individualized
assessment based on the facts presented). Because the district court's explanation
of its decision to vary significantly from the Guidelines' sentencing recommendation
is insufficient to permit meaningful appellate review, we must vacate the sentence
and remand for new sentencing further proceedings.634
2.
More on Booker.
Example: Assume that the defendant is convicted of one count of tax evasion. At trial in the
guilt determination phase, the Government attempted to show $1,000,000 of tax due and owing.
But, all the jury was required and did find in its general verdict of guilty was a substantial tax due
and owing without quantifying the amount. At sentencing, based only on the jurys finding of a
substantial but unquantified tax due and owing, the sentencing judge would start his calculations
with a Base Offense Level of 6.635 Assuming no other adjustments and a Criminal History Category
634
635
United States v. Engle, 592 F.3d 495, 501-504 (4th Cir. 2009) (footnotes omitted).
S.G. 2T4.1 (Tax Table).
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of I, the sentencing range from the Sentencing Table would be 0-6 months.636 The Guidelines
contemplate that the sentencing judge can receive evidence in the sentencing phase and make a
determination by a preponderance of the evidence that there is a tax loss requiring a higher Base
Offense Level.637 In this example, if, at sentencing, the Government shows the same tax loss of
$1,000,000, the Base Offense Level would be 20 (for tax loss over $400,000 but not in excess of
$1,000,000), which under the same assumptions would produce a sentencing table offense level of
20 (note no acceptance of responsibility adjustment) range of 33-41 months.638
Booker held that the Guidelines were unconstitutional in requiring the sentencing judge to
sentence based upon findings not found by the jury beyond a reasonable doubt.639 The solution
imposed by the Court is to make the Guidelines advisory rather than mandatory.640 As stated
recently, the argument that Booker precludes sentencing findings by a preponderance:
has been uniformly and unequivocally rejected by the federal circuit courts,
including our own. [Case citations omitted]. In Grier [United States v. Grier, 475
F.3d 556, 565 (3d Cir. 2007) (en banc)], we stated that the only facts a jury must
determine are those "that increase the statutory maximum punishment. . . . [O]nce
these facts are found, the judge may impose a sentence anywhere under that
maximum without jury determinations and proof beyond a reasonable doubt." 475
F.3d at 565. Although Grier involved a Fifth Amendment challenge, our
interpretation of Booker left no room for doubt regarding our view of the Sixth
Amendment question at issue here See id. at 564-65 (stating that the nonmandatory
nature of the Guidelines after Booker makes all of the difference with respect to
Sixth Amendment claims). Accordingly, appellants Sixth Amendment claim fails.641
636
S.G. Ch. 5, Part A (Sentencing Table).

S.G. 2T4.1 (Tax Table), because not more than $1,000,000.
638
I noted above that, given the lower standard of proof at the sentencing phase, the tax
loss number may be higher than the Government attempted to prove at the guilt determination phase.
I assume that this is not the case here.
639
Technically, under the Guidelines, a judge may depart, but the Court noted that
departures are limited and not to be made for factors already considered by the Guidelines, so that,
in most cases, departures are not available and their unavailability requires a sentence within the
range determined by the Judges sentencing findings.
640
See Rita v. United States, 551 U.S. 338 (2007); United States v. Benkahla, 530 F.3d
300, 312 (4th Cir. 2008), cert. denied 555 U.S. 1120 (2009) (noting sentencing judges may make
findings of fact under a preponderance of the evidence standard so long as [the] Guidelines
sentence is treated as advisory and falls within the statutory maximum authorized by the jury's
verdict).
641
United States v. Norman, 2012 U.S. App. LEXIS 4711, 24-25 (3d Cir. 2012). This
is a nonprecedential opinion but I think the cases it cites do establish the proposition. The case
citations are in addition to Grier, cited in the quote, are United States v. Hernandez, 633 F.3d 370,
373-74 (5th Cir. 2011); United States v. Treadwell, 593 F.3d 990, 1017 (9th Cir. 2010); United
States v. Ashqar, 582 F.3d 819, 824-25 (7th Cir. 2009); United States v. White, 551 F.3d 381, 386
637
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3.
The Chapter Two Offense Level.

a.
Tax Loss Numbers.

(1)
General.
I hope that the foregoing illustration convinced you that the tax loss numbers are usually the
key sentencing consideration in tax crimes. The tax loss number is determined at the first step of
the Guidelines calculation process (the determination of the Base Offense level in Chapter Two) and,
subject to Specific Offense Characteristics in Chapter Two, determines is the principal determinant
of the Offense Level coming out of Chapter Two.
The tax loss is: If the offense involved tax evasion or a fraudulent or false return, statement,
or other document, the tax loss is the total amount of loss that was the object of the offense (i.e., the
loss that would have resulted had the offense been successfully completed). U.S.S.G. 2T1.1(c)(1).
In most tax cases, it is the principal tax savings the taxpayer intended to achieve by his or her
conduct. The taxpayer need only to have intended to achieve the tax savings; the method by which
he intended to do so need not be realistic or probable.642
The tax loss numbers are initially calculated by the IRS based on its investigation and
included in the SAR that is sent to DOJ Tax with the recommendation for prosecution or further
grand jury investigation. Those numbers, subject to any adjustments DOJ Tax may require, will
then form the basis for plea negotiations. During the negotiations, the taxpayer will have some
opportunity to review the numbers and seek adjustments.
After the taxpayer is convicted, either by plea or trial, unless the Court finds that the record
contains sufficient information for sentencing (rarely the case), the federal probation office prepares
a Presentence Investigation Report, often referred to acronymically as PSI or PSR.643 I usually
refer to it as the PSR. In this report, the probation officer addresses the full range of sentencing
considerations identified by the Probation Office and specifically addresses the tax loss numbers in
deriving the indicated sentencing range. The probation officer is not required to limit his or her
inquiry to matters presented by the parties (the prosecutor and the defendant) and may make an
independent judgment that differs from any agreement between the parties as to the appropriate
sentencing factors and recommended sentence.644 The Guidelines provide that A thorough
(6th Cir. 2008); United States v. Benkahla, 530 F.3d 300, 312 (4th Cir. 2008); United States v.
Redcorn, 528 F.3d 727, 745-46 (10th Cir. 2008).
642
United States v. Robinson, 94 F.3d 1325, 1328 (9th Cir. 1996).
643
S.G. 6A1.1. A good detailed discussion of the role of the probation officer may be
found in Catharine M. Goodwin, The Independent Role of the Probation Officer at Sentencing, and
in Applying Koon v. United States which may be downloaded from the Sentencing Commission web
site.
644
FRCrP. Rule 32(d) requires that the PSR include all information regarding the
sentencing factors under the Guidelines and other information regarding factors that might affect
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presentence investigation is essential in determining the facts relevant to sentencing.645 If the

defendant does not agree with the Probation Officers conclusions, including the tax loss numbers,
the defendant may object and the court will resolve the differences in the Sentencing Hearing.
The Government and the defendant will often be able to agree upon the tax loss numbers,
and that will usually, but not always, be the case where a plea is entered. The agreed upon tax loss
numbers will usually be adopted by the Probation Officer in the PSR, but the Probation Officer can
make an independent determination of the tax loss number. If the Government and the defendant
do not agree upon the tax loss number or, if they do agree, but the Probation Officer determines a
higher number, the defendants lawyer must be particularly diligent to contest the tax loss numbers,
particularly if they can drop the defendant down on the sentencing table.
As noted above, the tax loss numbers are generally the criminal figures used in the
prosecution.646 However, they may not be the same. Lets use a simplified example. Lets assume
that, for purposes of the criminal prosecution, the Government believes and alleges in the indictment
(alright, the grand jury alleges) that the taxpayer evaded $100,000. That means that the Government
believes it can prove beyond a reasonable doubt that $100,000 was evaded and the taxpayer is
convicted on that basis. Suppose, however, that the Government can prove by a preponderance of
the evidence that the taxpayer really evaded $200,000 but did not allege the additional $100,000 in
the indictment because it could not prove that amount beyond a reasonable doubt. Further, suppose
that the taxpayers real tax liability for the year is $300,000, with the additional $100,000
representing items for which the Government cannot prove evasion at all under any standard of
proof.
During the sentencing phase, the Sentencing Guidelines require the court to calculate the tax
loss based upon a preponderance of the evidence, not beyond a reasonable doubt.647 Hence, in this
simple example, the Government could assert a $200,000 tax loss number at sentencing, even though
in the guilt determination phase tried to the jury it asserted only $100,000 (the criminal number).
Furthermore, as I develop below in discussing relevant conduct, the court can include in the tax loss
numbers tax for years either not charged or, if charged, the counts for the years were dismissed or
the jury returned a verdict of not guilty.
There are many subtleties that can be involved in the tax loss calculations. It is critical that
you address that issue as early in the investigation as possible and that, if necessary, you hire the
the Judges decision in imposing sentence, including any factors that might justify a departure.
Further pursuant to congressional authority, the Sentencing Commission has promulgated six policy
statements that reinforce the independent role of the probation office in advising the Court as to
sentencing factors and recommendations.
645
S.G. 6A.1., cmt.
646
See S.G. 2T1.1, Application Note 1 (Although the definition of tax loss
corresponds to what is commonly called the criminal figures, its amount is to be determined by the
same rules applicable in determining any other sentencing factor.)
647
6A1.3, Commentary.
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necessary expertise to assure that all possible avenues to whittle the tax loss numbers down are
explored.
Consider the argument we discussed above, based on James and its progeny, that doubt as
to the tax liability will preclude willfulness and thus avoid conviction. This argument can be
presented also at the sentencing phase. Thus, in the above example, although the taxpayer has been
convicted of $100,000 evasion, it may well be that the Government would be unable to sustain the
extra $100,000 because of doubt as to the certainty of the legal command of the statute. In addition,
the taxpayer may be able to find additional unclaimed benefits.
The Guidelines require certain presumptions as to the amount of the tax loss unless a more
accurate determination of the tax loss can be made.648 To illustrate, in the case of an individual
filing a fraudulent return, those presumptions are:
28% of unreported income or improperly claimed deductions
plus the full amount of false tax credits
In the case of individual failure to file, the tax loss is the the amount of tax that the taxpayer
owed and did not pay.649 This requires a calculation of the amount the taxpayer owes and then a
subtraction of the amount he paid (e.g., by withholding or estimated taxes). In making the gross tax
due calculation, in the absence of a more accurate determination, the presumption is:
20% of the gross income, less tax withheld or otherwise paid.650
And, you must keep in mind that the calculation of the gross tax is based upon the criminal figure
concept which excludes anything that the taxpayer could not have had an intent to evade (i.e., it is
not his civil tax liability less payments). There may be an opportunity to lower the tax loss in some
cases by arguing that the taxpayer had no intent to evade as to some or all of the tax loss the
Government seeks to apply. For example, I discussed above a failure to file syndrome defense to
a 7203 charge and mentioned that I launched that defense where the taxpayers income was
reported on W-2s and 1099s, thus assuring that the tax would ultimately be paid. (At least, that was
my story and I stuck to it.) In effect, the taxpayer was just deferring not evading his tax liability,
and the tax loss concept goes to the latter and not the former. One of the arguments I made to the
AUSA was that, even if the Government got a conviction, it may end up getting no incarceration
because the tax loss was zero (the potential for incarceration is an important factor in determining
whether Government should indict). As I said in discussing this anecdote, however, the prosecution
went away and whether this contributed to the decision not to prosecute is unknown. Still, I think
that, in appropriate cases, it is a consideration that should be considered and urged along with the
others factors that might avoid prosecution.
648
649
650
2T1.1(c), Notes (A)-(C) and Application Note 1.

S.G. 2.T.1.1.(c)(2).
2T1.1(c)(2), Note (A).
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The Government, of course, has the burden of establishing the tax loss at sentencing, but
these presumptions may kick in to meet that burden in the absence of the taxpayer producing a more
accurate calculation.651 Keep in mind, however, that as noted above, the percentage assumptions
apply to the items that meet the historic definition of criminal and, thus, should not apply to those
items historically excluded in determining the criminal figure. (See the discussion immediately
above related to failure to file, a discussion which is also applicable in other contexts.) Moreover,
in some cases, the Government will want to present the more accurate determination to generate a
higher tax loss than the presumption might generate.
Moreover, the Government may attempt to use extrapolations that it thinks are persuasive
to a court in determining a reasonable tax loss for sentencing. This often occurs, for example, in a
prosecution of tax preparers who have prepared many fraudulent returns. The Government may
audit only a small portion of the returns prepared by the preparer but will then attempt to extrapolate
a tax loss larger than the sampled returns for sentencing purposes. The use of such extrapolations
have been addressed only infrequently by the Courts, but the logical rule that has developed is that,
if persuasive, this type of evidence can be used.652
(2)
Unclaimed Deductions.
(a)
Filed Original.
I noted above in discussing the substantive offense of tax evasion, most commonly effected
by a fraudulent return, that a common defense strategy is to claim that the taxpayer had unclaimed
deductions (or in some cases, unclaimed credits or incorrectly reported income) that reduce or
eliminate the criminal tax number that the Government must prove as an element of the offense.
Can the defendant use this same strategy to reduce the tax loss number for sentencing purposes?653
651
For an example of reliance on the presumption, see United States v. Sullivan, 255 F3d
1256 (10th Cir. 2001) (involving an earlier Guideline where the presumption was 20%).
652
E.g., United States v. Ahanmisi, 2009 U.S. App. LEXIS 9136 (4th Cir. 2009)
(unpublished) where, in a tax preparer sentencing, at the Governments request, the tax loss was
determined based upon a projection to the total universe of returns prepared was from a sample the
Government developed. The Court of Appeals reversed, on the ground that the sample was not
random and thus could not be the basis for an inference that it was representative of the universe.
The Fourth Circuit later sustained the sentencing courts extrapolation in United States v. Mehta,
594 F.3d 277 (4th Cir. 2010) because, even though the sampling was not random (a baseline
requirement for statistical extrapolations), the error was harmless because the tax loss determined
by the sentencing court was reasonable under the facts. The Fourth Circuit distinguished Mehta
from Ahanmisi by stating that, unlike in Mehta, the sentencing court in Ahanmisi was unable to
compensate for the skewed sample. See also the concurring opinion in Mehta.
653
See generally Michael J. Gulden, Tax Loss Calculation Under United States
Sentencing Guidelines Section 2T1.1: Should Courts Account for Legitimate but Unclaimed
Deductions When Calculating a Defendant's Sentence?, 34 Sw U. L. Rev. 527 (2005).
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Most of the Courts that have addressed the issue have rejected the use of alleged unclaimed
losses. The reasoning is that S.G. 2T1.1(c)(1) provides:
654
If the offense involved tax evasion or a fraudulent or false return, statement, or other
document, the tax loss is the total amount of loss that was the object of the offense
(i.e., the loss that would have resulted had the offense been successfully completed).
The reasoning is that the object of the offense in the case of a filed return, certainly, is the omitted
income or falsely claimed deductions. The tax that is the object of the offense may be computed
simply by adjusting the return as reported by the omitted income or false deductions or credits or
may be estimated as set forth in the Guidelines (e.g., 25% of the omitted income or false deductions
or credits). But, since the taxpayer did not claim the deductions, the taxes he or she intended as the
object of the offense did not take into consideration the unclaimed deductions.
A recent Tenth Circuit decision adds nuance to the analysis and would permit deductions to
be claimed in computing the tax loss if related to the items otherwise giving rise to the tax loss.655
The Courts reasoning is quite good, so I quote it (case citations omitted):
Although a bright-line rule forbidding after-the-fact consideration of unclaimed
deductions is appealing and easily administrable, the plain language of 2T1.1 does
not categorically prevent a court from considering unclaimed deductions in its
sentencing analysis. Instead, 2T1.1 directs courts to calculate the tax loss that was
the object of the offense the loss that would have resulted had the offense been
successfully completed. Thus, the object of the offense refers to the amount by
which [a defendant] underreported and fraudulently stated his tax liability on his
return. Interpreting this language, some other circuits have held 2T1.1's language
requires courts to calculate only the tax loss the defendant intended when he or she
filed the fraudulent returnand not the actual tax loss suffered by the government.
These circuits take this logic a step further and conclude that the concept of intended
tax loss categorically does not allow for consideration of unclaimed deductions. We
disagree.
Even if we accept that 2T1.1 is directed at intended rather than actual tax
loss, it does not follow that in proposing a more accurate determination, a defendant
may never benefit from deductions that he could have claimed on the false tax
returns. We, of course, agree with Spencer and other circuits that where a defendant
offers weak support for a tax-loss estimate, nothing in the Guidelines requires a
sentencing court to engage in the nebulous and potentially complex exercise of
speculating about unclaimed deductions. But where defendant offers convincing
proof where the court's exercise is neither nebulous nor complex nothing in the
654
See United States v. Clarke, 562 F.3d 1158, 1164-5 (11th Cir. 2009) (citing cases in
adopting this majority view).
655
United States v. Hoskins, 654 F.3d 1086 (10th Cir. 2011)
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Guidelines prohibits a sentencing court from considering evidence of unclaimed

deductions in analyzing a defendant's estimate of the tax loss suffered by the
government. Indeed, a defendant (as well as the government, as happened here) may
be able to persuade a court that a revised calculation more accurately states the
underlying tax loss that should be applicable to a defendant's conduct. In those cases,
a court may exercise its discretion to consider additional evidence that could guide
its findings on the losses to the government relevant to sentencing.10
n9 We must emphasize, however, that 2T1.1 does not permit a defendant
to benefit from deductions unrelated to the offense at issue. For example, in
this case, the district court would have been permitted to consider Hoskins's
evidence of commission payments to escorts, but the Guidelines would not
allow her to account for unclaimed deductions for peripheral expenditures
unrelated to Companions. See Yip, 592 F.3d at 1040 ("[D]eductions are not
permissible [*22] if they are unintentionally created or are unrelated to the
tax violation, because such deductions are not part of the 'object of the
offense' or intended loss."). Thus, unclaimed deductions for student loan
interest or solar energy credits, for example, are not considered because they
do not relate to the "object of the offense" and are not relevant to restitution
or guideline calculations for sentencing purposes.
A hypothetical helps explain why consideration of unclaimed deductions may
be appropriate, even if 2T1.1 addresses only intended tax loss. Assume a restaurant
owner is convicted of criminal tax evasion for failing to report or pay taxes on
$100,000 income earned from his cash-only business. Let us also assume the
restaurant paid $80,000 in tax-deductible business expenses, all in cash. And finally,
let us assume the restaurant owner, despite evading his tax-filing responsibilities,
maintained immaculate business records documenting every business expense.
Assuming a 30% tax rate, if a court refused to consider the deductions under 2T1.1,
the restaurant owner would have caused a $30,000 tax loss. If the court did consider
the deductions, the government's tax loss would have been only $6,000. We then ask,
which of these two tax losses did the defendant intend?
The most logical conclusion is that the defendant sought to avoid paying what
he legally owed in taxes: $6,000. It would never have occurred to the hypothetical
defendant or his accountant that he would be cheating the government out of
$30,000. Indeed, it is somewhat odd to frame the 2T1.1 analysis in terms of
intended tax losswhen in reality, a tax-evading individual seeks only to avoid
paying taxes, not cause any specific loss to the government. Thus, if our hypothetical
defendant presented his meticulously [*24] kept business records to the sentencing
court, we believe the court could conclude reasonably that he "intended" a tax loss
of only $6,000. This conclusion is bolstered by the notes to 2T1.1, which explain
that when the offense involves "failure to file a tax return, the tax loss is the amount
of tax that the taxpayer owed and did not pay." USSG 2T1.1 Note (2).
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Moreover, the government is not supposed to reap windfall gains as a result

of tax evasion. See United States v. Gordon, 291 F.3d 181, 187 (2d Cir. 2002) (Tax
loss under 2T1.1 is intended to reflect the revenue loss to the government from the
defendant's behavior.); USSG 2T1.1 Application Notes ([A] greater tax loss is
obviously more harmful to the treasury . . . .). Indeed, the government cannot claim
to have lost revenue it never would have collected had the defendant not evaded his
taxes. For the purposes of calculating sentencing and restitution, courts consider the
loss that would have resulted had the offense been successfully completed. USSG
2T1.1. Had our hypothetical defendant's offense been completed successfully, he
would have avoided $6,000 in taxes, and the government would have suffered a
$6,000 tax loss. The government would of course be permitted to present evidence
showing that it in fact suffered a greater tax loss. Under 2T1.1, it is firmly within
the court's discretion to decide which party is correct. But the Guidelines do not
require courts to base their sentencing analysis on unadjusted gross receipts figures
untethered to actual taxes to which the government was entitled, but did not receive
as a result of tax evasion.
****
We also note that our interpretation comports with the evolution of 2T1.1's
language. The 1991 version of 2T1.1, which was superseded by the provision at
issue here, required courts to calculate tax loss based on gross income and prohibited
consideration of legitimate but unclaimed deductions. The 1991 Guidelines thus
established an alternative minimum standard for the tax loss which made
irrelevant the issue of whether the taxpayer was entitled to offsetting adjustments
that he failed to claim. USSG 2T1.1 Note (4) (1991). This rough-and-ready
calculation applie[d] the highest marginal rate to the amount of concealed income,
disregarding deductions that would have been available had the taxpayer filed an
honest return. When the Sentencing Commission amended the Guidelines in 1993,
however, it deleted its rule explicitly foreclosing consideration of unclaimed
offsetting adjustments. Accordingly, as the Second Circuit has explained, [b]ecause
the [Amended] Guideline permits consideration of legitimate but unclaimed
deductions, it tends to produce smaller figures than the 1991 guidelines, which does
not permit such consideration. Finally, it is worth noting that if the Commission
intended a categorical ban on unclaimed deductions, it chose odd language to
accomplish that task.
Does it seem right that a taxpayer could be convicted of tax evasion on the basis of a tax loss
that is less than the tax loss used in his sentencing? For example, assume that, at trial in the guilt
determination phase, the Government indicted and tried the defendant on the basis of a criminal tax
number of $100,000, but that through proof of unclaimed deductions, the defendant whittled that
number down to $20,000 and even forced the Governments summary witness to so testify based
on the strength of the proof of unclaimed deductions. Assume that the defendant is convicted
because $20,000 tax evaded is still material. Then, at sentencing, the Government seeks to sentence
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based on $100,000 tax loss without giving the taxpayer the benefit of the $80,000 proved unclaimed
deductions. Under the rule in the majority of circuits, the unclaimed deductions will be disallowed
and this phenomenon could exist. Under the Hoskins holding, so long as the unclaimed deductions
were related to the adjustments otherwise giving rise to the tax loss, the unclaimed deductions could
be allowed.
Finally, although I think Hoskins got the right analysis in the main, I am concerned that the
distinctions between related and unrelated unclaimed deductions makes logical sense. The dissent
picked this up and discussed it as follows:
I fail to see why it should matter whether the unclaimed deductions are related to the
offense or not. In fact, it might make more sense to permit unrelated deductions
precisely because they are unrelated to the offense and, thus, not part of the tax
evasion scheme to be addressed at sentencing. Cf. Clark v. United States, 211 F.2d
100, 103 (8th Cir. 1954) (Some times the failure to claim deductions in a return may
well be part of the taxpayer's scheme to cover up his unreported income as a matter
of not creating suspicion on the face of his return.). Once a district court begins
entertaining hypothetical unclaimed deductions, it must inevitably attempt to
calculate the government's actual revenue loss. Why stop at unclaimed deductions
relating to the specific offense? If the goal is to determine what an honest,
tax-minimizing taxpayer would have done to determine what tax was legally owed
(which becomes the goal when the court entertains unclaimed deductions), I would
think that courts would be compelled to consider all possible exemptions, deductions
and tax credits.
I think the point is well taken.
This is probably not an issue in most cases because most tax cases are pled and, in pleading,
the defense attorney will work with the prosecutor to agree upon a number that takes into
consideration unclaimed deductions. My experience is that prosecutors and the Special Agent
behind the prosecutor are willing to move to the correct tax number if they can get there without
undue expenditure of limited resources. However, if the defense attorney is too aggressive in the
unclaimed deductions, it is possible that the prosecutor and Special Agent will not agree, in which
case the issue would have to be resolved by the judge in the sentencing hearing where the prosecutor
may then make the argument that unclaimed deductions dont count and the judge may agree. So
this is an instance where the Government may have the ultimate upper hand that it will play only
where the defense attorney is too aggressive in his claims of unclaimed deductions.
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Finally, at least one commentator has taken the position that Chavin is not consistent with
the structure off 2T1.1., as it has been amended.656 At least one court has rejected the concept.657
(b)
Failure to File.
Consider the application of this rule where the tax offense is failure to file rather a fraudulent
return omitting income or misstating claimed deductions or credits. If the defendant originally filed
a fraudulent return without claiming otherwise available deductions or credits, I suppose that some
sense of fairness could support denying the deductions or credits since the tax loss the defendant
intended was not affected by the unclaimed deductions. But, if the defendant filed no return, is he
or she to be further punished in the sentencing phase by rigid estimates simply because he or she did
not claim the deductions? I can certainly make a distinction between the two circumstances.
In a recent case,658 the Fourth Circuit held that a defendant can be denied deductions after
failing to file. It is important to note that the appeal involved a conviction for tax evasion, not for
failure to file.659 As I noted earlier in this text, tax evasion convictions where the taxpayer has failed
to file are rare. The Court reasoned:
The Court adopted the reasoning in Chavin that the tax loss is the intended tax loss
rather than the actual tax loss. This appears to be semantics in a failure to file case
although this was an evasion conviction the taxpayer had never quantified under
oath the deductions to which he was entitled. In other words, there is a point of
reference for making the calculation as to intent with a filed return that point of
reference does not exist for a return that is not filed.
In the final analysis, the Court seems to have simply punted on the issue rather than
require sentencing courts to compute tax liabilities with more detail. The Court thus
concluded its discussion.
The Delfinos chose not to file their income tax returns. They also
chose not to cooperate with the initial IRS audit, at which time they
could have claimed deductions to which they were entitled. By doing
so, they forfeited the opportunity to claim these deductions. Were the
district court now to attempt to reconstruct the Delfinos' income tax
656
Michael J. Gulden, Tax Loss Calculation Under United States Sentencing Guidelines
Section 2T1.1: Should Courts Account for Legitimate but Unclaimed Deductions When Calculating
a Defendant's Sentence?, 34 Sw U. L. Rev. 527 (2005).
657
United States v. Gordon, 291 F.3d 181 (2d Cir. 2002).
658
United States v. Delfino, 510 F.3d 468 (4th Cir. 2007), cert. denied 555 U.S. 812
(2008).
659
The Court noted this difference in a footnote (510 F.3d at p. 473, n. 1). But, since
the same tax loss table is used for both evasion and failure to file, the only difference is whether a
28% or 20% rate applied to the reconstructed taxable income.
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returns post hoc, it would be forced to speculate as to what

deductions they would have claimed and what deductions would have
been allowed. This would place the court in a position of considering
the many hypothetical ways that the Delfinos could have completed
their tax returns. Chavin, 316 F.3d at 678. The law simply does not
require the district court to engage in this speculation, nor does it
entitle the Delfinos to the benefit of deductions they might have
claimed now that they stand convicted of tax evasion.
Making judgment calls about a more accurate computation of taxes is not dissimilar to what
sentencing courts do all the time with financial crimes that involved a great deal more uncertainty
than tax computations.660 Taxes are not that complex indeed, even with their complexity, Congress
still imposes upon the ordinary citizen the responsibility of filling them out with such assistance as
may be needed. The sentencing process is more than vigorous enough to assist in generating a good
tax number for sentencing purposes. Federal judges are up to this task.
What troubles me most about this rhetoric is that it seems to offer license to sentencing
courts for sloppy thinking in this key component of the sentencing decision. And, it leaves open the
door for sentencing to turn upon taxes that the taxpayer does not owe.661
Perhaps a more solid ground to deny some deductions specifically itemized deductions
when the taxpayer fails to file a return is the Code requirement that itemized deductions be claimed
on the return.662 If there is no return, then technically the taxpayer the defendant in the sentencing
proceeding is not entitled to claim itemized deductions that he or she almost certainly would have
elected had he or she filed a return.663 All other things being equal, one might surmise that this rule
would apply in a criminal failure to file case in the tax loss calculation, denying the defendant the
benefit of the itemized deductions which could have substantially lowered his guideline range.664
Where this is a potential problem (it wont be if the itemized deductions are not sufficiently large
to reduce the base offense level), a defendant might consider filing the return immediately upon the
660
Perhaps the poster child of difficult but necessary calculations is United States v.
Olis, 429 F.3d 540, 545-549 (5th Cir. 2005), dealing with uncertainty in markets based, cook the
books losses.
661
The decision in Delfino has been criticized. See United States v. Stadtmauer, 2009
U.S. Dist. LEXIS 9945 (D.N.J. 2009), affd 620 F.3d 237, 257 n. 22 (3d Cir. 2010). For a defense
of Delfinos restrictive approach, see Timothy J. Coley, Comment: Disputed Deductions: Delfino
and the Fourth Circuit's Prudent Adoption of the Restrictive Approach to Tax Evasion Sentencing,
87 N.C.L. Rev. 234 (2008).
662
63(e).
663
See e.g., Jahn v. Commissioner, 2010 U.S. App. LEXIS 17525 (3d Cir. 2010)
(unpublished opinion).
664
See United States v. Kellar, 2010 U.S. App. LEXIS 19129 (5th Cir. 2010)
(unpublished) where the sentencing court excluded itemized deductions from the sentencing tax loss
calculation for the years the taxpayers did not file returns.
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conviction. One problem is that the filing of the return might then be used as an admission in the
event the case is subsequently remanded for another trial. Moreover, since the return must be true
complete and accurate, the defendant may not want to file he or she is aware of facts that produce
tax liabilities that are in excess of the amount determined by Government determined and submitted
to the Probation Officer and the Court. Think it through before you file.
Finally, one additional strategy to get the Probation Officer or the Court to consider itemized
deductions in a failure to file situation is to stress that the sentencing tax loss is the intended tax
loss. Certainly, it is unreasonable to believe that a taxpayer cheating by failing to file his or her tax
returns intended to cheat on an amount that would not have been due had he or she filed his or her
tax return. Worth a try.
(3)
Corporate Diversions to Shareholders.

(a)
The Unclaimed Deduction Issue.
In situations where the taxpayer cheats on taxes through a closely held C Corporation,
there will be the double level tax loss to consider. For example, if a taxpayer diverts gross income
from the corporation to himself without reporting the income by either of them, the corporation will
have evaded tax and the taxpayer will also have evaded tax. A frequent taxpayer gambit in order
to avoid the corporate level tax is to urge that the constructive payment from the corporation to the
shareholder was really additional salary for which the corporation is entitled to a deduction, thus
producing no corporate level tax loss. The courts generally reject that argument, for the corporation
did not in fact pay the amount as salary. Hence, the tax construction is that the corporation has
constructively received the income and distributed it to a shareholder, which means that the
corporation has a tax loss number and the shareholder will also have a tax loss number, provided that
the distribution is a dividend or is taxable in part as capital gain to the shareholder.665
(b)
The Dividend Issue.
Treating the transaction as a constructive receipt by the corporation and distribution to the
shareholder is pretty much a no-brainer. However, complexity may lie in how the distribution is
taxed to the shareholder. Under the Code, a corporate distribution is taxed to the shareholder as a
dividend only to the extent of the corporations cumulative or current earnings (E&P); the balance
of the distribution, if any, is taxed either a nontaxable return of capital to the extent of basis in the
stock or a capital gain to the extent of the excess of the distribution over basis.666 These
determinations require that E&P be calculated. Therein lies the potential problem.
665
See e.g., United States v. Gordon, 291 F.3d 181 (2d Cir. 2002); and United States v.
Martinez-Rios, 143 F.3d 662, 671 (2d Cir. 1998).
666
301 and 316.
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Without getting into the complexities of determining E&P, suffice it to say here that E&P
can be very difficult to calculate.667 Since the November 2001 Guidelines, the difficulties inherent
in E&P are resolved by permitting presumptions to apply (34% of diverted amount at corporate level
and 28% at individual). In the tax loss calculations, the amount of the corporate diversion is taxed
to the corporation and in full to the diverting shareholder without reduction for the corporate tax and
without any other E&P calculations.668
The really troubling point is that the presumption can create a tax loss for sentencing
purposes where proper analysis of E&P could show that, in fact, there was no tax due and owing.
Indeed, in the civil case usually following after conviction, it may well be that the taxpayer can
establish for civil tax purposes (where the truth and not presumptions control) that there is no
dividend and no shareholder level tax. Should our criminal tax system require that sentencing be
driven by presumptions inconsistent with the real facts?
Finally, there may still be some play in the E&P issue at the guilt determination phase.
Remember that in a tax evasion case the Government must prove a material tax due and owing.
What if a foray into the murky swamp of E&P could show that there is really no shareholder level
tax or, if there were such a tax, it was not material? Remember that the Governments burden of
proof in a criminal case is to show the elements beyond a reasonable doubt. There is no such
presumption that the Government can rely upon in the guilt determination phase.
(4)
Timing Issues
A taxpayer may claim a tax benefit (deduction or credit) that he is entitled to in a later year.
This is usually referred to as a timing difference. The issue is how the tax loss in the improper
earlier year is to be calculated and, specifically, whether the amount of the tax loss is adjusted
downward in that year. To take an extreme case, assume that a defendant improperly claimed a
$1,000 deduction in year 1 that he is entitled to take in year 2 but does not claim in year 2. Assume
further that the tax saved by claiming the deduction focusing only on year 1 is $250 (actual) or $280
(presumptive). But is that the real loss to the Government because the Government will make that
up in year 2 when the taxpayer does not claim the deduction?669 In the bare facts given, what is the
real tax loss? It is not $250 (actual) or $280 (presumptive), but rather (assuming constant or
materially the same marginal rates), it is zero except for, perhaps, the time value of money for that
short one year timing period. (Normally, except in collection evasion cases, the time value of money
is not considered in calculating the tax loss.)
667
E.g., Bittker & Eustice, Federal Income Taxation of Corporations and Shareholders,
Chapter 8.
668
See 2.T.1.1, Application Note 7.

Note that there is a real sweet civil mitigation issues that could be addressed here if
the defendant were to attempt to deduct the same item in year 2, but let's not get bogged down in
noncriminal matters here because I assume that he did not claim the deduction in year 2.
669
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In the only opinion to address the issue,670 the timing issue was in the context of depreciation
where a current deduction was claimed for items that could be depreciated over future years. The
Government wanted to apply the 28% presumptive rate to the entire deduction claimed without any
mitigation for the future tax revenue the Government did or would collect. The defendant cried foul
and the Court listened. The Court opined:
Mr. Stadtmauer argues that since the issue is only one of timing there is no tax loss
associated with these deductions. The Government disagrees, arguing that there is
at a least a loss due to the time value of money. However, the Government does not
argue that the loss is the time value of money, rather the Government argues that
because there is some loss due to the time value of money the 28% presumptive rate
should be used. This Court agrees with the Government that the time value of money
should be considered as a tax loss, but disagrees that using the 28% rate is
appropriate; the 28% rate does not "fit the circumstances" for these deductions. See
USSG 2T1.1, Application Note 1.
The Court recognizes, and the Government conceded at the sentencing
hearing, that as a general matter, tax loss under the Guidelines for the crimes at issue
here does not include interest and penalties. Id. The Court also recognizes that
interest calculations are meant to account for the time value of money, so arguably
any interest based calculation should not be included under the Guidelines. But, the
Court also finds that recognizing a time value of money effect for these deductions
is completely different than the general case of calculating and adding interest, as
addressed in Application Note 1. Under 2T1.1(c), "the tax loss is the amount of
loss that was the object of the offense." Here, the purpose of taking the deductions
in full in the year incurred was to receive the time value of money benefit from
paying less taxes now rather than spread over time; it was not merely some ancillary
benefit to the primary object of avoiding taxes by taking a deduction that was not
permissible at all, the time value of money benefit was the object of the offense.
The question, then, is what is a reasonable way to estimate this loss. As
noted above, to accept the presumptive 28% rate as the Government argues would
be unfair and drastically overstate the tax loss. The Court finds that the most
reasonable way to account for this loss is by using the Government's own method for
compensating itself for the time value of money related to underpayments of tax.
Interest on underpayments is calculated by the IRS pursuant to 26 U.S.C.
6621(a)(2). This rate is determined quarterly. Id. at 6621(b). For the years 1997
to 2001, the IRS rate for non-corporate underpayments varied between 7% and 9%,
with the rate declining in the years after 2001. See Rev. Rul. 2008-54. This Court
finds that using a rate of 8%, a rate in the middle of the range, is reasonable. This
approach is not perfect. It does not account for compounding, but it also does not
670
United States v. Stadtmauer, 2009 U.S. Dist. LEXIS 9945 (D. N.J. 2009), affd 620
F.3d 238 (3rd Cir. 2010).
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account for the exact timing of the deductions. However, exact precision is not
required. This Court finds that the other methods suggested either understate or
overstate the intended loss and that this method is the most fair and reasonable
estimate of the loss intended for these items. See Gricco, 277 F.3d at 356
(5)
Tax Loss Numbers In Conspiracies.
The tax loss numbers can be substantially enhanced in conspiracies because co-conspirators
tax loss numbers (except for such losses prior to the defendants joining the conspiracy) may be
aggregated and included as relevant conduct.671 For example, if an object of the conspiracy is to
have the participants not report their illegal income, all conspirators tax loss numbers will be
aggregated.672 Even if the defendant in question is not indicted for conspiracy, under the concept of
relevant conduct, the Government establish a conspiracy at sentencing thus allowing aggregation
of the conspirators tax loss numbers. This latter observation may be more theoretical than real,
because if the Government thinks there is a conspiracy, it will almost certainly indict for conspiracy
because of the guilt determination phase benefits of a conspiracy charge.
There can be a positive side benefit for a conviction solely for a tax conspiracy. The benefit
is that the Base Offense Level calculation for such conspiracies under 2T1.9 is 10 or, if higher, the
BOL determined under the regular tax guideline in 2T1.1. But, as surfaced in a recent case,673
close analysis of the interface of these two provisions requires that 2T1.1 have no application,
regardless of the tax loss, if the defendant is not convicted of the substantive tax crime and is only
convicted of the conspiracy crime. This would mean that, even if the defendant was co-conspirator
in a large conspiracy where the resulting tax loss is billions of dollars, it will not be treated as a tax
loss for sentencing purposes. That is weird.
b.
FBAR Violations.
I discussed earlier the FBAR filing regime.674 The FBAR filing requirement obviously
serves in part to backstop the tax system by encouraging U.S. taxpayers to report properly their
income arising from foreign accounts subject to the FBAR filing regime. In this regard, I note that
in the IRSs juggernaut involving offshore accounts triggered by its dispute with the big Swiss bank
UBS, the Government waived FBAR violations related to legal income if the taxpayers had properly
reported and paid tax on the income from the foreign account(s). But, the FBAR filing requirement
supports other nontax Government law enforcement efforts and is not just a tax-related requirement.
671
U.S.S.G. 1B1.3(a)(1)(B) (includes reasonably foreseeable acts). Hence, the tax loss
does not include loss from acts that had already occurred at the time the defendant joins the
conspiracy. United States v. Hunter, 323 F.3d 1314, 1319-20 (11th Cir. 2003); and United States
v. Word, 129 F.3d 1209, 1213 (11th Cir. 1997).
672
United States v. Gricco, 277 F.3d 339 (3d Cir. 2002).
673
United States v. Coplan, ___ F.3d ___, 2012 U.S. App. LEXIS 24613 (2d Cir.
11/29/12).
674
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I address here what this means when a taxpayer is found guilty either by plea or trial of an FBAR
filing requirement in a tax setting involving only legal income. Importantly for sentencing
purposes, the Guidelines provide a different sentencing regime in Chapter Two, Part S, for FBAR
and other Bank Secrecy Act reporting violations.
This books focus is tax crimes and principally about tax crimes arising from legal source
income. I accordingly limit my discussion here to FBAR violations particularly failure to file the
FBARs in order to hide foreign financial accounts used for committing tax crimes related to legal
source income. With that limitation, we can move through the Guidelines discussion fairly
efficiently. The starting point in the Guidelines for monetary report violations, including FBARs,
is Chapter Two, Part S. The starting point for tax violations is Chapter Two, Part T, for tax
violations. You will recall that the methodology in the Guidelines Chapter Two is to determine a
Base Offense Level with certain adjustments before moving on to the other Adjustments in Chapters
Three and Four. The question I now address is whether, if a defendant committing FBAR violations
as a means to hide legal source income were convicted of the FBAR violations would he or she
receive a materially different offense level in Chapter Two, Part S, than he or she would if he or she
had been convicted only of tax violations moving the calculations to Chapter Two, Part T.
The Chapter Two Part S calculations, specifically S.G. 2S1.3, are at first glance very ugly.
They calculate the Chapter Two offense level as a monetary crime (theft) keyed to the amount that
is not reported on the FBAR. The Chapter Two Part T calculations, by contrast, key the Chapter
Two offense level to the amount of tax evaded. The result is that the offense level under Part S can
move up far quicker than the offense level under Part S. I wont get into the details of how that
works, provide a summary guide with precautions in the footnote.675
675
I could meticulously, in many pages, walk through the steps, but here only summarize
them. After S.G. 2S1.3(a) keys the offense level the theft table in S.G. 2B1.1 (the theft table), it
provides certain adjustments in S.G. 2S1.3(b). The first two of those adjustments increase the
offense level determined under the theft table, but the third, which applies if the first two do not,
decreases the offense level to 6. The cross reference in S.G. 2S1.3(c) says the offense level for tax
crimes is determined under the Chapter Two Part T if they are higher than the S.G. 2S1.3 offense
level. The Part T tax offense level will usually not be higher than the Part S offense level unless the
Part S offense is reduced to 6 as noted earlier in this footnote. So, the holy grail is to make sure
that the Part S offense level is reduced to 6, otherwise the Part S offense level will usually greatly
exceed the Part T offense level and the Part S offense level will apply. To repeat, you get to offense
level 6 only if the first two adjustments in S.G. 2S1.3(b) do not apply. For those wanting to follow
through on that (particularly important if the defendant is charged or agrees to plea to an FBAR
violation), you will have to parse the first two exceptions in S.G. 2S1.3(b). They are not models of
clarity, and I am not aware of any definitive authoritative interpretations of those first two
exceptions. You will have to research and reach your own conclusions, but as noted you definitively
do not want either of those exceptions to apply because the resulting Part S offense level will be
higher than the Part T offense level which requires that the Part S offense level apply. I would offer
more of a discussion of those two exceptions, except that certain anecdotal evidence from the recent
plea agreements to FBAR violations in a tax crime setting suggest the all of the parties the
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c.
Specific Offense Characteristics.

(1)
Failure to Report Illegal Income.
The tax Base Offense Level may be increased by two levels if the defendant failed to report
or to correctly identify the source of income exceeding $10,000 in any year from criminal activity.
S.G. 2T1.1(b)(1). This is a straight-forward enhancement. Is there unreported or incorrectly
identified income on the return and is it from criminal activity?676
(2)
Sophisticated Means in Tax Cases.
The tax Base Offense Level may be increased by two levels if the offense involved
sophisticated means. S.G. 2T1.1(b)(2). I have discussed above the change to the 2001
Guidelines from the term sophisticated concealment to sophisticated means and noted that, even
under the more restricted pre-2001 Guidelines, courts were quick to find sophisticated concealment
in tax cases.677
defendants, the prosecutors, the Probation Office and the courts seem to assume that sentencing
is under the Part T rather than Part S, which necessarily means that they believe the first two S.G.
2S1.3(b) exceptions do not apply and thus, the third exception applies and drops the Part S offense
level to 6. Having said that, I should also note that one experienced litigator commented during the
meeting of the Civil and Criminal Penalties Section at the 2011 ABA Tax Section Meeting that the
USAO for SDNY interpreted FBAR violations in a tax setting to invoke one of the two adjustments
in S.G. 2S1.3(b), thus precluding application of the Tax Guidelines under S.G. 2T1. Therefore,
anyone representing a person charged with an FBAR violation reach their own level of comfort on
this issue. I dont think it is self-evident from the actual words used. I do think, however, that the
sense of the exceptions is that they should not apply in a legal source income tax case. Note that a
similar issue of interpretation of this language is presented in 31 U.S.C. 5322(b) that, on parallel
language, double ups the criminal penalties for FBAR and other Bank Secrecy Act violations. I
reached a similar conclusion in discussing that statute but, not because the text compels it, but
because the anecdotal evidence indicates that the language is interpreted not to apply to legal source
income tax violations. I should finally caution that this anecdotal evidence may even be a form of
dicta, because in these anecdotal plea settings it was clear that the actual Booker sentence would
never get above the base level provided in 31 U.S.C. 5322(b) and would not be as prescribed in
S.G. 2S1.3 by reference to the theft table. Caution is in order.
For an example of the calculation under S.G. 2S1.3, see my Tax Crimes Blog Preliminary
Sentencing Findings in Simon (3/18/11).
676
In United States v. McKinney, 686 F.3d 432, 435 (7th Cir. 2012), citing United States
v. Oestreich, 286 F.3d 1026, 1030-31 (7th Cir. 2002), the court held that it need not be the
defendants illegal income but the illegal income of his spouse if it was not reported.
677
E.g., United States v. Friend, 104 F.3d 127 (7th Cir. 1997).
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United States v. Kontny, 238 F.3d 815 (7th Cir. 2001)

Before Posner, Easterbrook, and Evans, Circuit Judges.
Posner, Circuit Judge. The Kontnys were convicted of fraudulent nonpayment of federal
payroll taxes and sentenced to prison. Their appeal complains about the denial of their motion to
suppress documents and statements that they gave to an Internal Revenue Agent and about a
sentencing increase that they received by virtue of the sophisticated character of their fraud.
The Fair Labor Standards Act requires employers to pay their hourly employees time and
a half for overtime (that is, hours worked above 40 hours a week), but, of course, the overtime wage
is taxable income to the employee. To defeat both the overtime and tax laws, the Kontnys, who own
an equipment-supply business that employs 25 to 30 workers, concocted the following scheme. They
would pay the workers normal wages rather than time and a half for overtime work but not report
the overtime wages to the government as taxable income, thus making it easy (or easier) for the
workers to avoid detection if they did not report this income on their tax returns. The employees
benefited from this scheme by obtaining a greater after-tax income and the Kontnys by not paying
either overtime wages at the rate of 1.5 times regular wages or payroll taxes on the overtime wages.
The scheme continued for at least a decade until the Kontnys became embroiled in a bitter
labor dispute with their workers. One of them decided to tattle to the government. He visited an
office of the IRS and was interviewed by Special Agent Babbitt, a criminal investigator. The matter
was turned over to Revenue Agent Furnas to investigate. Revenue agents, unlike special agents,
conduct civil rather than criminal investigations. Furnas interviewed a number of employees of the
Kontnys company and concluded that despite their disgruntlement over the labor dispute, they
might well be telling the truth. In that event the Kontnys had committed a fraud; and tax fraud is
criminal, though more often handled on a civil than on a criminal basis.
****
Moving to the sentencing issue, we confront the argument that the efforts the Kontnys made
to conceal their scheme of tax evasion did not amount to the sophisticated concealment that
requires a two-level sentencing bonus under U.S.S.G. 2T1.4(b)(2). That they did make such efforts
is not in question. They wrote separate checks to the employees, one for regular wages and one for
overtime, and sometimes the overtime checks would include reimbursement for expense items to
disguise the fact that the checks were for wages. The Kontnys programmed their computer so that
the amount of the overtime checks was classified in nonwage expense categories. The stubs for the
overtime checks, which they gave their accountant, likewise placed the expense in nonwage
categories.
But did these efforts amount to sophisticated concealment? They were not very
sophisticated in the lay sense of the word, especially in context. By creating a fraud that involved
the knowing participation of more than two dozen employees, they not only armed the employees
to blackmail them but greatly increased the risk of eventual detection, though it is true that the fraud
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persisted for at least a decade before the inevitable occurred. The Kontnys efforts at concealment
were sophisticated in relation to a case in which the owner of a shop evades taxes by emptying the
drawer of the cash register before counting the days cash receipts and puts the cash thus skimmed
into a shoebox and slides it under his bed, but unsophisticated in relation to a scheme of evasion that
does not depend on the continuing goodwill of ones entire workforce and that creates a paper trail
that is more difficult to follow to its guilty conclusion than the one the Kontnys created.
The existence of a statutory sentencing range reflects the fact that criminal acts that involve
the same statutory elements (in the case of criminal tax fraud they are essentially that the defendant
knowingly made a materially false return, 26 U.S.C. 7206(1); United States v. Pirro, 212 F.3d 86,
89 (2d Cir. 2000)) may differ in circumstances that are pertinent to the appropriate penalty. One
criminal act may be much more lucrative for the offender because it involves a very large amount
of money relative to the cost of committing the offense, and so a heavier punishment will be
necessary to deter. Another may be more lucrative than the average not because it involves a larger
take but because the probability of detection is lower; an economist would say in such a case that
the expected profit of the crime was greater. The existence of a sentencing range as opposed to
a sentencing point allows these differences to be reflected in sentencing. The federal sentencing
guidelines guide and discipline the judges choice of the sentence within the range. They do this by
fixing a sentencing range (narrower than the statutory range) for the average offense within the
offense category (here, criminal tax fraud) and by prescribing bonuses and discounts to adjust for
relevant differences between the average and the particular offenders offense.
The more sophisticated the efforts that an offender employs to conceal his offense, the less
likely he is to be detected, and so he should be given a heavier sentence to maintain the same
expected punishment, and hence the same deterrence, that confronts the average offender.
Implementation of this rule requires both determining how much the average offense is concealed
and relating the guideline concept of sophistication to deterrent needs. The complication in the
first half of this inquiry is that fraud is by nature self-concealing -- its success depends on its being
hidden from the victim. The average criminal tax fraud thus involves some concealment;
sophisticated tax fraud must require more. A parallel distinction has arisen in determining when
statutes of limitations in fraud cases are tolled. If concealment were enough to toll such a statute of
limitations, the statute would be tolled in almost every case, because fraud is inherently covert. So
the courts distinguish between the initial fraud and any distinct efforts at cover up (fraudulent
concealment) and toll the statute only when the defendant has resorted to such efforts. * * * *
Likewise the concealment that is inherent in criminal tax fraud, as in our shoebox example, must be
distinguished from efforts over and above that concealment to prevent detection. Only the latter
permit the sentencing enhancement.
In light of its purpose and context, we think sophistication must refer not to the elegance,
the class, the style of the defrauder -- the degree to which he approximates Cary Grant -- but
to the presence of efforts at concealment that go beyond (not necessarily far beyond, for it is only
a two-level enhancement that is at issue, which in this case added roughly six months to the
defendants sentences) the concealment inherent in tax fraud. It is true that the guideline
commentary illustrates with examples suggesting a higher level of financial sophistication:
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sophisticated concealment means especially complex or especially intricate offense conduct in

which deliberate steps are taken to make the offense, or its extent, difficult to detect. Conduct such
as hiding assets or transactions, or both, through the use of fictitious entities, corporate shells, or
offshore bank accounts ordinarily indicates sophisticated concealment. U.S.S.G. 2T1.4,
Application Note 3. But these are offered as examples, as emphasized in United States v. Friend, 104
F.3d 127, 130 (7th Cir. 1997), and United States v. Clements, 73 F.3d 1330, 1340 (5th Cir. 1996);
the essence of the definition is merely deliberate steps taken to make the offense ... difficult to
detect. When the term sophisticated is defined so, it becomes apparent that the district judge did
not commit a clear error (the applicable standard of appellate review of this ruling too, e.g., United
States v. Madoch, 108 F.3d 761, 765 (7th Cir. 1997); United States v. Aragbaye, No. 99-50603,
2000 WL 1818365 at *6 (9th Cir. Dec. 13, 2000)) in enhancing the defendants sentences.
The Kontnys point out that the government rarely prosecutes criminal tax fraud that is not
sophisticated in the sense indicated by the facts of this case. Armed as it is with fearsome civil
remedies involving huge penalties -- for example the 75 percent penalty for taxes fraudulently not
paid, 26 U.S.C. 6663 -- the government brings few criminal tax cases (fewer than 700 a year)
relative to the amount of tax fraud; and perhaps none against defendants less sophisticated than the
Kontnys. We do not know this to be the case, but will assume it is for the sake of argument. No
matter. The question is what the Sentencing Commission took to be the average criminal tax fraud
when it promulgated the sophisticated concealment guideline back in 1987. That would be the
benchmark for courts to use to decide whether the Commission would have wanted the sentences
of the Kontnys increased by reason of the character or extent of their efforts at concealment. The
governments lawyer told us without contradiction from his opponent that before the guidelines era
the federal government prosecuted many unsophisticated criminal tax frauds, as illustrated by our
shoebox case. The defendant would usually plead guilty and the judge impose a light sentence
(roughly half of all tax evaders were sentenced to probation without imprisonment, while the other
half received sentences that required them to serve an average prison term of twelve months,
U.S.S.C. 2T1.1, Background Commentary), and sentences in those days were essentially
unappealable unless they exceeded the statutory maximum. So these were easy cases for the
government. When the guidelines came into force, limiting sentencing discretion, the government
shifted its focus to the more serious cases, not wanting to become involved in trials of minor cases
when under the guidelines defendants might be reluctant to plead guilty because they would be
facing a heavier sentence and might, like so many other federal criminal defendants these days,
appeal their sentences. So today the average criminal tax fraud that is prosecuted is more
sophisticated than when the concept of sophistication was introduced into the guidelines. That is
no reason for thinking the Commission would consider the enhancement imposed in this or like
cases excessive even if they are the only type of criminal tax fraud being prosecuted nowadays.
Affirmed.
------------[END OF KONTNY CASE]-------------Consider also the following from a recent Second Circuit case:
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Defendant argues that the means used to commit his crime were not
sophisticated because they were not complicated or esoteric in any way. They were,
instead, garden variety tactics. The commentary to the Guidelines defines
sophisticated means as especially complex or especially intricate offense conduct
pertaining to the execution or concealment of an offense. U.S.S.G. 2T1.1(b)(2),
n.4. In this case the record shows that defendant used an elaborate combination of
means to evade taxes, including, inter alia, the purchase of money orders at multiple
locations; the structuring of investments in multiple deposits to avoid reporting
requirements; the creation of phony loan documents; and numerous cash real estate
investments. Even if we assume for the argument that these individual actions were
not themselves "sophisticated," the coordination of these actions clearly involves
sophistication. See United States v. Jackson, 346 F.3d 22, 25 (2d Cir. 2003) ("[E]ven
if each step in the scheme was not elaborate, the total scheme was sophisticated in
the way all the steps were linked together"); United States v. Lewis, 93 F.3d 1075,
1083 (2d Cir. 1996) (holding, in a tax case, that the sophisticated means
enhancement applied even when "each step in the planned tax evasion was simple,
[because] when viewed together, the steps comprised a plan more complex than
merely filling out a false tax return"). In light of the complex coordination involved
in this case, we agree with the District Court that a two-level enhancement for
sophisticated means was appropriate.678
I cite in the footnote some of other cases that have found relatively minimum concealment activity
to be sophisticated means for purposes of this enhancement.679
The American Bar Association has commented as follows on the cases, culminating in
Kontny, (ABA Tax Section Letter to U.S. Sentencing Commission re Comments on Proposed
Amendments to Guidelines, unofficially reprinted at 2001 TNT 68-67 (4/9/01)):
The practical consequence is that the sophisticated conduct enhancement almost has
become automatic in tax fraud cases. Effectively, this automatically increases
offense levels in tax fraud cases by two levels. We believe this leads to a number of
tax fraud defendants being punished more severely than the Commission intended.
678
United States v. Elia, 2010 U.S. App. LEXIS 18189 (2d Cir. 2010) (Unpublished).
See United States v. Clarke, 562 F.3d 1158, 1166 (11th Cir. 2009) (defendant
concealed the true extent of his income by: (1) depositing his salary from the church and the credit
union into accounts that were not registered in his own name; (2) instructing the church to make
payments out of these accounts directly to his personal creditors; and (3) having the school and the
church pay his life and disability insurance premiums directly to the insurance carriers); ( United
States v. Barakat, 130 F.3d 1448 (11th Cir. 1997) (deposit of attorneys fee into attorneys trust
account was sophisticated means, although acknowledging that it was a close question); United
States v. Campbell, 491 F.3d 1306 (11th Cir. 2007) (use of campaign account and others credit cards
to conceal cash expenditures).
679
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Finally, if the tax evasion occurs along with some other offense, it is quite important to
differentiate the crimes so that any sophisticated means for the non-tax crime is not used to bootstrap
an enhancement of the tax crime.680
4.
Acceptance of Responsibility.
Overwhelmingly, tax indictments are resolved by plea rather than trial. One of the principal
factors encouraging a guilty defendant to plea is to obtain the 2 or 3 level positive (downward)
adjustment resulting from acceptance of responsibility. The Guidelines provision is:
3E1.1. Acceptance of Responsibility
(a)
If the defendant clearly demonstrates acceptance of responsibility for
his offense, decrease the offense level by 2 levels.
(b)
If the defendant qualifies for a decrease under subsection (a), the
offense level determined prior to the operation of subsection (a) is level 16 or
greater, and upon motion of the government stating that the defendant has assisted
authorities in the investigation or prosecution of his own misconduct by timely
notifying authorities of his intention to enter a plea of guilty, thereby permitting the
government to avoid preparing for trial and permitting the government and the court
to allocate their resources efficiently, decrease the offense level by 1 additional level.
Examples of considerations in determining whether the defendant qualifies for this adjustment are:
(a) truthfully admitting the conduct comprising the offense(s) of conviction,
and truthfully admitting or not falsely denying any additional relevant conduct for
which the defendant is accountable under 1B1.3 (Relevant Conduct). Note that a
defendant is not required to volunteer, or affirmatively admit, relevant conduct
beyond the offense of conviction in order to obtain a reduction under subsection (a).
A defendant may remain silent in respect to relevant conduct beyond the offense of
conviction without affecting his ability to obtain a reduction under this subsection.
However, a defendant who falsely denies, or frivolously contests, relevant conduct
that the court determines to be true has acted in a manner inconsistent with
acceptance of responsibility;
(b) voluntary termination or withdrawal from criminal conduct or
associations;
(c) voluntary payment of restitution prior to adjudication of guilt;
(d) voluntary surrender to authorities promptly after commission of the
offense;
(e) voluntary assistance to authorities in the recovery of the fruits and
instrumentalities of the offense;
680
See United States v. Stokes, 998 F.2d 279 (5th Cir. 1993) (sophistication in means
to avoid detection of embezzlement is not sophistication in means to avoid discovery of tax liability;
There is nothing sophisticated about simply not disclosing income to your accountant.).
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(f) voluntary resignation from the office or position held during the
commission of the offense;
(g) post-offense rehabilitative efforts (e.g., counseling or drug treatment); and
(h) the timeliness of the defendants conduct in manifesting the acceptance
of responsibility.681
In tax cases, this adjustment is generally achieved by a plea agreement and acceptance of
responsibility sufficiently before the trial date that significant resources are avoided. The
Application Note provides (and cautions):
3. Entry of a plea of guilty prior to the commencement of trial combined with
truthfully admitting the conduct comprising the offense of conviction, and truthfully
admitting or not falsely denying any additional relevant conduct for which he is
accountable under 1B1.3 (Relevant Conduct) (see Application Note 1(a)), will
constitute significant evidence of acceptance of responsibility for the purposes of
subsection (a). However, this evidence may be outweighed by conduct of the
defendant that is inconsistent with such acceptance of responsibility. A defendant
who enters a guilty plea is not entitled to an adjustment under this section as a matter
of right.
By the same token, the Guidelines recognize the possibility that a defendant may qualify for
this favorable acceptance of responsibility downward adjustment even though not pleading guilty.682
In rare situations a defendant may demonstrate acceptance of responsibility even though he
exercises his constitutional right to a trial, as where a defendant goes to trial to assert and preserve
issues that do not relate to factual guilt.683 In most trials, however, the defendant will often the
defendant will do enough that he or she has no hope of qualifying for the acceptance of
responsibility downward adjustment.
Acceptance of responsibility requires that the defendant admit at least the criminal conduct
related to the offense of conviction. This can be a delicate exercise if, in the course of providing a
full admission of the offense of conviction, the defendant must disclose information that could
potentially convict him or her of another as yet uncharged crime. Perhaps the most commonly
encountered situation is with regards to relevant conduct which, as readers will recall, is uncharged
criminal conduct related to the offense(s) of conviction. Relevant conduct, a key concept in the
Guidelines, can be used to increase the Guidelines range but does not allow incarceration beyond
that allowed by the offense(s) of conviction. For example, in tax cases, tax losses in years other than
the year(s) of conviction can increase the base offense level and thus increase the Guidelines range.
While the defendant must be forthcoming to the Probation Office and the Court about the conduct
underlying the offense of conviction, what about the relevant conduct? Must the defendant be
forthcoming and admit relevant conduct which, after all, is conduct for which he is not convicted?
681
682
683
S.G. 3E1.1(a), cmt 1.

3E1.1, cmt. N. 2.
Id.
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I hope readers can see the Fifth Amendment concerns in the question. The Guidelines address these
concerns by treating relevant conduct differently than conduct involved in the offense of conviction.
The comments thus state that a key consideration for acceptance of responsibility is that the
defendant either truthfully admit or, at least not falsely deny, any relevant conduct. S.G. 3E1.1 cmt
n.1(A). The comment elaborates:
A defendant may remain silent in respect to relevant conduct beyond the offense of
conviction without affecting his ability to obtain a reduction under this subsection.
However, a defendant who falsely denies, or frivolously contests, relevant conduct
that the court determines to be true has acted in a manner inconsistent with
acceptance of responsibility.
This concept works as intended where the relevant conduct, as in other years tax losses are
really independent crimes to or at least not entwined with the offense(s) of conviction. For example,
usually the facts the defendant must truthfully disclose as to the offense of conviction for tax evasion
for year 03 will not necessarily alone mean he is guilty of tax evasion for years 01 and 02, even
though the same pattern of conduct occurred in years 01 and 02. The tax losses for those years can
be considered as relevant conduct and, under the principles noted above, the defendant does not have
to admit them. However, a more subtle issue arises where the relevant conduct is inextricably
entwined with the conduct of the offense of conviction so that supplying the full facts with respect
to the offense(s) of conviction would incriminate the defendant for the other offense. A recent
decision684 addressed this issue where a defendant pled guilty to five counts of tax perjury,
7201(1), with respect to bribery income. The defendants dilemma was that cooperation as to the
facts underlying the tax counts of conviction required admission of bribery. This is often not a
concern because the plea agreement will foreclose such a prosecution, so the court is addressing a
situation in which the plea agreement did not foreclose such a prosecution. The court said:
Saani, however, asserts that if he were forced to disclose the source of his funds, then
he might face prosecution for a crime distinct from tax evasion, viz., bribery. Courts
disagree whether the compulsion a defendant faces if he may be denied a reduction
of his sentence unless he provides potentially incriminating information is
sufficiently forceful to trigger the protection of the Fifth Amendment. Compare
United States v. Frazier, 971 F.2d 1076, 1084, 1086 (4th Cir. 1992) (conditioning a
reduction under 3E1.1 "on the waiver of [a defendant's] Fifth Amendment right is
[] analogous to (and constitutionally indistinguishable from) the choice confronting
the defendants in [a] plea bargain case[] ... [it] may encourage defendants to provide
information that could prove incriminatory, but it does not compel them to do so");
with United States v. Olivares, 905 F.2d 623, 628 (2d Cir. 1990) (requiring defendant
to accept responsibility for crimes other than those to which he has pled guilty ...
in effect forces [him] to choose between incriminating [himself] ... or forfeiting [a]
substantial reduction[] in his sentence); United States v. Amico, 486 F.3d 764, 779
(2d Cir. 2007) (same in dictum); see also United States v. Cohen, 171 F.3d 796, 805
684
United States v. Saani, 650 F.3d 761 (DC Cir 2011).
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(3d Cir. 1999) (a majority of circuits construe denied 3E1.1 reductions as denied
benefits rather than penalties).
In the case, the Court was able to dodge the tensions, but readers should be aware of them.
5.
Conspiracy Enhancements.
The Guidelines provide a potential enhancement if the counts include a Klein conspiracy.
The enhancements are as follows:
First, if the Base Offense with Specific Offense Characteristics for the substantive count
(evasion, tax perjury, etc.) is less than 10 (which would be a tax loss of $5,000 or less, with no
Specific Offense Characteristics), then the Base Offense Level will be kicked to 10.685 This kicker
almost never applies, however, because it is extremely rare that the Government pursues a case
where the tax loss is that low.
Second, the Guidelines impose a 4 level kicker to the number otherwise calculated if the
Klein conspiracy involved planned or threatened use of violence to achieve the object of the
conspiracy.686 For the prototypical tax crime, there is no such conspiracy. There may well be a
conspiracy, but its means will not included planned or threatened use of violence.
Third, the Guidelines impose a 2 level kicker if the Klein conspiracy was intended to
encourage persons other than the conspirators directly involved to violate the internal revenue laws
or impede the administration of the tax laws.687
6.
Consecutive or Concurrent Sentences; Stacking.
Consider the following examples in which illustrate how actual sentences for counts of
conviction are handled through concurrent and consecutive sentences.
Example 1: Assume the tax loss number under the guidelines is $60,000,000 and that there
are no adjustments. Base Offense Level is 30. Assume a 3 level reduction for acceptance of
responsibility and Criminal History Level of I. The sentencing Offense Level is 27. The Sentencing
Table indicates a sentencing range of 70-87 months. A defendant convicted of a single count of tax
evasion ( 7201) under these assumptions could be sentenced to a maximum of 60 months (5 years)
even though the Guideline range exceeds 60 months. However, if the defendant were convicted of
two counts of tax evasion, the two counts of conviction would permit the maximum 5 year sentence
to be served consecutively, thus making the maximum incarceration period under the statute 10
685
686
687
2T1.9(a)(1).
2T1.9(b)(1).
2T1.9(b)(2).
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years, or 120 months.688 With the maximum incarceration period of 120 years, the entire 70-87
months Guidelines range is comfortably within the maximum. (Such consecutive sentencing is
sometimes referred to as stacking.689)
Example 2: If we used $2,600,000 in tax evaded on a single evasion count with the same
assumptions, we would have a Base Offense Level of 24, a final offense level of 21, and a
Sentencing Guideline range of 37-46 months, easily within the maximum statutory period even for
a single evasion count of conviction.
Example 3: If we assume a conviction under a single count of 7206(1), tax perjury, with
the same tax loss numbers and assumptions as in Example 2, we would encounter the statutory
maximum. The Guideline range would be 37-46 months. You will recall that 7206(1) has a
maximum incarceration period of 3 years per count. Both ends of the indicated guideline range
months would exceed the maximum statutory incarceration period, so sentence would be capped by
the maximum three year incarceration period even for the worst offender -- the type of offender for
which a judge otherwise would, if he or she could, do an upward departure. But, if the defendant
were convicted of two counts of tax perjury, the maximum incarceration period would be 6 years
and even the upper-end of the guidelines ranges falls comfortably within that maximum. Moreover,
if the judge were inclined to depart upward, he or she would have some room to do so without
exceeding the statutory maximum.
7.
To Group or Not to Group - That is a Question.
I noted repeatedly in the crimes section that a pattern of criminal activity that is essentially
a unified crime may violate more than one criminal statute and thus could give rise to several or
even many criminal counts in an indictment drafted at the discretion / whim of the prosecutor. For
example, a pattern of conduct might constitute tax evasion and tax perjury i.e., the taxpayer files
a false return underreporting his or her tax liability. Should the prosecutor be able to squeeze out
a greater sentence by charging tax evasion and tax perjury for the same pattern of activity?
The Sentencing Guidelines adopt so-called grouping rules that eliminate such charge
manipulation as a factor in sentencing. The Introductory Comments to the grouping rules provide:
In order to limit the significance of the formal charging decision and to
prevent multiple punishment for substantially identical offense conduct, this Part
provides rules for grouping offenses together. Convictions on multiple counts do not
result in a sentence enhancement unless they represent additional conduct that is not
688
See See 5G1.2; Note that the two counts are grouped under Guideline Chapter III,
Part D., so that the tax loss number is the critical determinant even though two counts are involved.
For use of concurrent sentences, see United States v. Gordon, 291 F.3d 181 (2d Cir. 2002); and
United States v. McLeod, 251 F.3d 78, 83 (2d Cir. 2001).
689
See United States v. Chase, 296 F.3d 247 (4th Cir. 2002) (holding that stacking is
permissible even for offenses grouped for sentencing purposes).
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otherwise accounted for by the guidelines. In essence, counts that are grouped
together are treated as constituting a single offense for purposes of the guidelines.
****
Essentially, the rules in this Part can be summarized as follows: (1) If the
offense guidelines in Chapter Two base the offense level primarily on the amount of
money or quantity of substance involved (e.g., theft, fraud, drug trafficking, firearms
dealing), or otherwise contain provisions dealing with repetitive or ongoing
misconduct (e.g., many environmental offenses), add the numerical quantities and
apply the pertinent offense guideline, including any specific offense characteristics
for the conduct taken as a whole. (2) When offenses are closely interrelated, group
them together for purposes of the multiple-count rules, and use only the offense level
for the most serious offense in that group. (3) As to other offenses (e.g., independent
instances of assault or robbery), start with the offense level for the most serious
count and use the number and severity of additional counts to determine the amount
by which to increase that offense level.690
Grouping is required for closely related counts involving substantially the same harm.
Substantially the same harm may be found, inter alia, where the offense level is determined largely
on the basis of the total amount of harm or loss.691 This is the case with tax crimes and their
frequent companion crimes where the underlying substantive crime is a tax crime.692
The cost to the defendant of not grouping, as noted in the summary, is additional level
increases depending upon the nature of the counts of conviction that are not grouped. The process
is illustrated in a recent case involving multiple counts of conviction for 7202 (failure to pay over
withheld taxes) and 7206(1) tax perjury on the defendants own 1040. Set aside for the moment
whether these two types of crimes should be grouped (I will deal with that issue later), and just
assume for present purposes that they should not be grouped. Here is the explanation of the process
based on that assumption:
[T]he probation officer calculated the amount of tax loss for the failure-to-pay-over
group at $316,220, resulting in a base offense level of 18, and the amount of tax loss
for the filing-false-returns group at $115,395.75, resulting in a base offense level of
16. Because there were multiple groups, the probation officer then applied 3D1.4
to determine their combined offense level. Taking the group with the highest offense
level, the failure-to-pay-over group at 18, and increasing that offense level by 2
based on 3D1.4, the probation officer determined the combined offense level to be
20. Finally, the probation officer accounted for Register's acceptance of
690
S.G. Chapter Three, Introduction.

3D1.2(d).
692
See 3D1.2 (flush language specifically grouping the following: 2T1.1, 2T1.4,
2T1.6, 2T1.7, 2T1.9, 2T2.1, 2T3.1.
691
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responsibility and cooperation in the investigation by applying a 3-level reduction

pursuant to 3E1.1 to arrive at a total offense level of 17. Because Register had no
prior convictions, his criminal history category was I, and the resulting guideline
range was 24 to 30 months.693
Now, lets look at some examples to address the issue of whether multiple counts of
conviction for different offenses should be grouped:
Example 1: If the taxpayer were convicted of both tax evasion and tax perjury for the same
year and the tax loss were $100,000, the sentencing guidelines would apply to set the sentence in
the manner noted above just as if the taxpayer had been convicted of only the tax evasion count. As
you can see in this simple example, grouping takes away the incentive to load up counts for
essentially the same conduct. (Note, however, that if the tax loss were sufficiently high that the
resulting incarceration period exceeded the maximum for a single count (say evasion in this case),
then the Government might want to use multiple counts overlapping the same conduct in order to
permit stacking, although I have never seen an evasion and tax perjury count for the same year
arising from the same false return.)
Example 2: Assume a taxpayer is convicted of evading $50,000 tax in year 1 and $50,000
tax in year 2. The two counts are grouped and the aggregate tax loss is used to derive the Base
Offense Level without further adjustment for the number of counts. The same is true even if the
conviction is for tax evasion for year 1 and tax perjury for year 2. This means that the taxpayer
evading $100,000 in one year is sentenced basically the same as the taxpayer evading $100,000 in
the aggregate for two or more years. In a tax case, of course, the Government will likely have
counts for each year because showing a pattern, even if only a two year pattern, assists in proving
willfulness, which is often difficult in a single year evasion case. But, the addition of counts does
not increase the sentence. (You will remember from the relevant conduct discussion that, if the
Government chose to indict only for one of the years in the example, it still might include the tax
loss number for an unindicted year in order to affect the sentencing.)
Example 3. Taxpayer is convicted of 4 counts of willful failure to collect and pay over
employment taxes under 7202 and three counts of tax perjury under 7206(1). This is a closer
call because the 7202 offense which arises from the harm of not paying over trust fund taxes (i.e.,
the employees funds withheld to pay their tax liabilities may not be viewed as the same general type
of harm from merely avoiding the defendants personal income. The former harm is more in the
nature of embezzlement than the latter. And, the Guidelines are different. The 7202 Base Offense
Level is in 2T1.6, whereas the 7206(1) Base Offense Level is in 2T1.1. Both are subject to the
same tax table for determining the Base Offense Level based on the tax loss. Recently, the Eleventh
Circuit held that, depending upon the facts, the decision whether to group or not could go either way,
but that, in the case on the facts, there was sufficient nexus between the two offenses because a
critical element of the tax perjury charge was that the defendant had falsely claimed that the tax had
693
United States v. Register, 678 F.3d 1262 (11th Cir. 2012)
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been withheld and paid over.694 What this means is that the skilled advocate may have to strive to
convince a sentencing court of sufficient nexus. In the case cited, the district court had not been
persuaded (or did not understand the close call that could go either way), but the court of appeals
reversed.
But, even where the offense is determined by total amount of loss, grouping may not be
allowed unless substantially the same harm is involved. Thus, although tax crimes of conviction
against the federal fisc involve the same harm, where the crimes of conviction are tax and money
laundering, substantially the same harm is not involved. The societal interest and thus the harm
addressed by tax crimes is not the same as the harm addressed by money laundering crimes.695
Nontax fraud crimes where there is a real victim (e.g., embezzlement, etc.) will likely not be viewed
as involving substantially the same harm and thus will not be grouped with any tax crimes for
omitting the income from the fraud.696
Where counts are not grouped into a single group, they are grouped into two or more groups
according to the grouping rules and the appropriate sentence determined for each group as follows:
The combined offense level is determined by taking the highest offense level in the individual
groupings and adding levels by a formula determined by the seriousness of the other group(s).697
So, as you can see, depending upon the facts, denial of grouping may increase the levels.
There are many complexities that inhere in the grouping rules, but they require more effort
for me to write and my intended readership group to understand (particularly given my writing
limitations), so I just say here that you should seek further help when faced with grouping issues.698
For an example of using the grouping provisions as a means for achieving a departure, see
p. 365, below.
694
United States v. Register, 678 F.3d 1262 (11th Cir. 2012).

United States v. Bove, 155 F.3d 44 (2d Cir. 1998).
696
United States v. Martin, 363 F.3d 25, 41 (1st Cir. 2004) (collecting cases); and United
States v. Vucko, 473 F.3d 773 (7th Cir. 2007) (also collecting and discussing cases, but noting that
the tax 2-level enhancement in 2T1.1(b)(1) may not apply where there is no grouping in order to
avoid double counting). As these cases note, however, some courts do group some nontax counts
(e.g., fraud) with tax counts. See e.g., United States v. Haltom, 113 F.3d 43 (5th Cir. 1997).
697
3D1.4.
698
See CTM 43.07 (2008 ed.).
695
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8.
Relevant Conduct.
Prior to the Sentencing Guidelines, the convicted defendants conduct beyond the offense(s)
of conviction could be and was often considered in sentencing.699 Basically, any thing that the
sentencing judge felt should be considered in determining an appropriate sentence could be
considered, so long as it was not a constitutionally prohibited factor or other matter well outside the
boundaries of good judgment. This principal was codified as follows:
No limitation shall be placed on the information concerning the background,
character, and conduct of a person convicted of an offense which a court of the
United States may receive and consider for the purpose of imposing an appropriate
sentence.700
This practice was incorporated in the Sentencing Guidelines under the general rubric of
relevant conduct.701 Section 1.B.3.(a) provides:
1B1.3. Relevant Conduct (Factors that Determine the Guideline Range)
(a) Chapters Two (Offense Conduct) and Three (Adjustments).
Unless otherwise specified, (i) the base offense level where the guideline
specifies more than one base offense level, (ii) specific offense characteristics and
(iii) cross references in Chapter Two, and (iv) adjustments in Chapter Three, shall
be determined on the basis of the following:
(1)
(A) all acts and omissions committed, aided, abetted, counseled,
commanded, induced, procured, or willfully caused by the defendant; and
(B) in the case of a jointly undertaken criminal activity (a criminal
plan, scheme, endeavor, or enterprise undertaken by the defendant in concert with
699
CTM 43.04 (2008 ed.) provides:

The Guidelines relevant conduct provisions are consistent with the
long-standing principle that both before and since the American colonies became
a nation, courts in this country and in England practiced a policy under which a
sentencing judge could exercise a wide discretion in the sources and types of
evidence used to assist him in determining the kind and extent of punishment to be
imposed within limits fixed by law. Williams v. New York, 337 U.S. 241, 246
(1949); accord Witte v. United States, 515 U.S. 389, 402 (1995) ([V]ery roughly
speaking, [relevant conduct] corresponds to those actions and circumstances that
courts typically took into account when sentencing prior to the Guidelines
enactment.) (quoting United States v. Wright, 873 F.2d 437, 441 (1st Cir. 1989)
(Breyer, J.)).
700
18 U.S.C, 3661.
701
See William W. Wilkins, Jr. & John R. Steer, Relevant Conduct: The Cornerstone
of the Federal Sentencing Guidelines, 41 S.C. L. REV. 495, 499 (1990), written by authors
intimately involved in conceptualizing and drafting the original Guidelines.
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others, whether or not charged as a conspiracy), all reasonably foreseeable acts and
omissions of others in furtherance of the jointly undertaken criminal activity,
that occurred during the commission of the offense of conviction, in preparation for
that offense, or in the course of attempting to avoid detection or responsibility for
that offense;
(2)
solely with respect to offenses of a character for which 3D1.2(d)
would require grouping of multiple counts, all acts and omissions described in
subdivisions (1)(A) and (1)(B) above that were part of the same course of conduct
or common scheme or plan as the offense of conviction;
(3)
all harm that resulted from the acts and omissions specified in
subsections (a)(1) and (a)(2) above, and all harm that was the object of such acts and
omissions; and
(4)
any other information specified in the applicable guideline.
This plays out in tax cases most often in determining the tax loss which drives the base
offense level under Sentencing Guideline 2.T.1.1. Relevant conduct may be included in loss from
(i) uncharged conduct (both state and federal taxes), (ii) loss from charged conduct of which the
defendant was acquitted, and (iii) from conduct beyond the criminal statute of limitations.702 For
example, assume that, through a common pattern, the taxpayer commits tax evasion for years 1
through 6, evading $100,000 in each year. The Government indicts him on April 14 of year 9,
charging tax evasion ( 7201) for all open years 3-6 (open years is a statute of limitations concept
that I discuss later in these materials). The Government cannot indict for years 1 and 2. Assume
that the taxpayer pleads guilty to two counts of tax evasion for years 5 & 6. The tax loss for
purposes of setting the Base Offense Level is $900,000. And, this result is not changed even if, for
example, the jury determines guilt (rather than by plea) for the two years and then determines that,
for the remaining years charged, the Government did not prove guilt beyond a reasonable doubt (i.e.,
the jury acquits the defendant). What this means is that the defendant rides up the scale, gets a
higher BOL, and a greater indicated sentencing range. Relevant conduct is the concept that permits
that phenomenon. See particularly 1.B.1.3.(a)(2) above.
In United States v. Watts,703 the Supreme Court in a per curiam opinion held that that
sentencing courts could consider as relevant conduct the defendants conduct on charges for which
they had been acquitted. The Court reasoned that Court historically could take all factors into
consideration as to background, character and conduct in sentencing and the Guidelines were not
intended to change that. Accordingly, all relevant conduct of which the defendant is shown by a
preponderance of the evidence in the sentencing phase may be considered. The Court noted that an
acquittal is not a finding that the defendant did not commit the criminal act charged; it is simply a
finding that the Government did not prove beyond a reasonable doubt that he committed the act.
In the sentencing phase, the Government may still be able to prove that he committed the act by a
preponderance of the evidence.
702
703
See e.g., United States v. Maken, 510 F.3d 652 (6th Cir. 2007).
519 U.S.148 (1997).
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Justices Stevens and Kennedy dissented. Note the following from Justice Kennedys dissent:
At the least it ought to be said that to increase a sentence based on conduct
underlying a charge for which the defendant was acquitted does raise concerns about
undercutting the verdict of acquittal, concerns noted by Justice Stevens and the other
federal judges to whom he refers in his dissent. If there is no clear answer but to
acknowledge a theoretical contradiction from which we cannot escape because of
overriding practical considerations, at least we ought to say so. Finally, as Justice
Stevens further points out, the effect of the Sentencing Reform Act of 1984 on this
question deserves careful exploration. This is illustrated by the fact that Justices
Scalia and Breyer each find it necessary to issue separate opinions setting forth
differing views on the role of the Sentencing Commission.
For these reasons the case should have been set for full briefing and
consideration on the oral argument calendar. From the Courts failure to do so, I
dissent.
Although Booker and its progeny did not change the Watts holding that acquitted conduct can be
relevant conduct to one or more counts of conviction, by making the sentencing guidelines advisory
permits a district court discretion under to avoid the problems of automatic use of acquitted conduct
to increase the sentence.704
The scope of relevant conduct that may be considered is sweeping indeed. As one author
has noted:
A sentence may often include consideration of dismissed counts, acquitted counts,
and uncharged conduct, which, in turn may include conduct occurring outside the
statute of limitations, or uncharged activities stipulated to in a plea agreement. For
a tax offense, this means that a guilty plea or conviction on one tax year may permit
a court to add the tax loss from dismissed or acquitted counts as well as conduct not
charged in the indictment, when determining the guideline range. Similarly, when
uncharged conduct in a money-laundering or currency reporting case can be used to
increase the guideline range. When a conspiracy charge is brought, the defendant
may be sentenced for all taxes or monies involved in the scheme even if there is no
704
As to Watts surviving for permit consideration of acquitted conduct, see e.g., United
States v. Vaughn, 430 F.3d 518 (2d Cir. 2006) (collecting cases); as to authority to avoid the
strictures of acquitted conduct, see United States v. Settles, 520 F.3d 920 (D.C. Cir. 2008)
(questioning somewhat backhandedly the wisdom of the policy of considering acquitted conduct,
and holding the Booker-Rita-Kimbrough-Gall line of cases may allow district judges to discount
acquitted conduct in particular cases - that is, to vary downward from the advisory Guidelines range
when the district judges do not find the use of acquitted conduct appropriate.
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conviction on any substantive offense, if the acts and omissions of otherwise were
reasonably foreseeable to the defendant in connection with the criminal activity.705
Focusing on the inclusion of conduct in years otherwise barred by the criminal statute of
limitations, in tax cases the risk is how far the Government will go back in enhancing the tax loss
that is the principal determinant of the Guidelines Sentencing range? Prosecuted tax crimes have
patterns which, in this context, often means multiple years. Sometimes the years involved can go
way beyond the criminal statute of limitations. The risk is that the Government will throw into the
relevant conduct mix all of those way out early years to drive up the sentencing range. That is a
theoretical risk, but it is mitigated by practical considerations. Investigating such past history is not
a good use of the Governments resources, particularly if the easier picking years (the later years)
generates sufficient tax loss to make the Governments point by the criminal prosecution. A good
recent well-publicized example is in the recent wave of prosecutions related to foreign financial
accounts. In calculating the tax loss, the Government has not reached back to all years that it could
have (some of the accounts went back to the 1980s and earlier and could have generated much larger
tax losses). Moreover, everyone practicing in this area has seen this phenomenon that the
Government does not press on early years except in the most unusual of cases. What often happens
is that, in the initial criminal investigation years, the IRS will investigate years that will be within
the 6 year criminal statute of limitations by the time a criminal indictment could be achieved. The
IRS will have worked the criminal numbers / tax loss for those years and perhaps, if continuity is
needed, for one or two years before the earliest possible prosecution year. For example, say that the
investigation starts on 5/1/08 when the statute of limitations is technically open for years 01 - 06
(assumed the taxpayer filed the 01 year on 10/15/02 and filed the 07 year on 4/15/07). The taxpayer
has a pattern of conduct for all of the years 01 - 07. The IRS agent and his manager know, however,
that the investigation will last 1 years year and that DOJ Tax CES and USAO processing time
before indictment would be another 6 months. So the expected date of the indictment will be, say,
during the filing season of year 10, say 3/15/10, when only the years 03 - 07 have open statutes of
limitation. They therefore make the decision to focus on the years 03 - 07 and devote the investigate
resources to work up the criminal numbers (basically same as tax loss numbers) for those years.
Their numbers indicate an aggregate tax loss in the investigated years of $500,000. At sentencing,
they know that $500,000 will achieve a Base Offense Level of 20 which, with the usual acceptance
of responsibility, will achieve a sentencing Offense Level of 17 with a resulting Guideline range of
24 -30 months. The question during the investigate phase presented is whether they will devote the
705
Comisky, Sentencing Guidelines for Tax, Money Laundering and

Currency-Reporting Offenses, G-1 of the materials from the ABA 15th Annual National Institute
on Criminal Tax Fraud (1998), being a September 1997 working draft of new Ch. 16 of the
Comisky, Feld and Harris treatise. For authority on the points in the quoted text see: United States
v. Lawrence, 189 F.3d 838, 844-45 (9th Cir. 1999) (consistent with Watts, holding that relevant
conduct may include acts for which a defendant was acquitted); United States v. Newland, 116 F.3d
400, 404-05 (9th Cir. 1997) (relevant conduct includes acts underlying a reversed conviction);
United States v. Fine, 975 F.2d 596, 600 (9th Cir. 1992) (relevant conduct may include conduct in
dismissed counts); United States v. Williams, 217 F.3d 751 (9th Cir. 2000) (relevant conduct may
include conduct outside the criminal statute of limitations).
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significant additional resources required to dredge up some higher tax loss in order to get a higher
sentencing range. In the example presented, the investigation would have to find more than
$500,000 in the barred years to get to a higher level. That amount or more may be there, but the IRS
is not likely to go looking for it. They can achieve their sentencing goals on the $500,000 found
within the scope of the years that will not be barred by the time they obtain an indictment.
These examples are subject to a lot of variations, but if we assumed that, in the foregoing
example, the tax loss in the investigated years turns out near the end of the CI investigation to be
$950,000, the question is whether the IRS would then choose to devote further, potentially
significant resources to squeeze out enough to clearly get above $1,000,000 in the aggregate for the
higher sentencing range. Based on my experience, I doubt it. Again the IRS will likely have
achieved its goals with the sentences already investigate. Of course, where the IRS has some extra
incentive or animus against the taxpayer, it may range far and wide for sentencing range enhancers
that it might not have otherwise explored or developed.
Some other examples should give you some idea of the sweep of the relevant conduct
consideration in determining tax loss.
First, in a federal tax case where the state taxes are also evaded based on the same pattern
of conduct, the sentencing court should consider the state tax loss as relevant conduct.706 For
inclusion of the state tax loss number as relevant conduct, there is no requirement that the state have
convicted the defendant. Thus, the defendants federal sentence could be enhanced by the state tax
loss and, should the state convict for the state tax evasion, the defendant would have suffered
criminal punishments twice for the same conduct, albeit by two different jurisdictions. If that were
to occur, would the defendant have a double jeopardy argument?
706
United States v. McElroy, 587 F.3d 73, 88-89 (1st Cir. 2009) (discussing cases,
including United States v. Powell, 124 F.3d 655 (5th Cir. 1997); United States v. Fitzgerald, 232
F.3d 315, 318 (2d Cir. 2000); and United States v. Maken, 510 F.3d 654, 657-60 (6th Cir. 2007)
(citing Powell)). DOJ Tax policy is that prosecutors may seek inclusion of state tax loss in
appropriate cases -- e.g., where the state tax loss is clearly part of the same course of conduct or
common scheme or plan, where the loss is easily ascertainable, and where the loss is clearly due to
criminal conduct. See CTM 3.00 (2008 ed.), 3.00 AAG Argrett Memo of 12/4/98 (citing, inter
alia, Powell). Indeed, the Court in McElroy said that, despite the indication in earlier cases from
other circuits, the Guidelines make the inclusion of state tax loss relevant conduct mandatory. Of
course, the McElroy Court noted, relevant conduct has to be relevant to the crime of conviction.
Thus, the escape for the defendant may be that the pattern involved in the federal crime of
conviction is not the same pattern as involved in the state conduct. For example, evading state
income tax on the same income omitted in federal income tax count of conviction for evasion would
likely be relevant conduct, but perhaps evading the state sales tax on the income might not be. I
have not further researched the authorities in this area and just offer it as a lead to practitioners who
have the incentive to do so.
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Second, in establishing relevant conduct to up the sentence, the Government or the court can
rely upon even illegally seized evidence that could not be used in determining guilt.707
The potential adverse effects of relevant conduct must be considered at all stages. But the
first critical time that the rubber hits the road on relevant conduct is in the plea process. I discuss
pleas specifically below, but one of the classic strategies for the Government is to load up an
indictment with counts and then settle the case by plea bargaining to one or in some cases two
counts (referred to in the tax field as major counts). Because the tax loss for the dismissed counts
may be considered in sentencing, the Governments giving up of the dismissed counts is usually
meaningless in terms of the sentence. Using the example I just noted, if Government charges for
years 03 - 05 and the taxpayer obtains a plea for one year (say 06), the Government will have
already calculated the loss for all three years and will require (usually) the taxpayer to stipulate to
the indicated tax loss for the three years (subject to such downward adjustments to the amount that
the defendant has been able to negotiate). The Guidelines sentence thus will be the same whether
the plea is to three years or to one year and that Guidelines sentence in the example noted is within
the maximum allowed for a one year sentence. In short, the Guidelines sentence calculations are
unaffected by the ability by the plea to knock out two counts in the indictment. This phenomenon
is well recognized. For example, in a recent case I handled where the client was charged with three
counts, she pled to one but, as the Presentence Report (often referred to as the PSR) succinctly notes:
47.
Had the defendant been convicted on all counts of the Indictment, the
guideline imprisonment range would remain the same.
A defendant is not required to discuss relevant conduct (conduct other than the conduct in
the count(s) of conviction). A defendants failure and even refusal to discuss relevant conduct
cannot be used to deny him or her an acceptance of responsibility downward adjustment.708
However, if the defendant discusses relevant conduct and lies about it, acceptance of responsibility
can be denied.709
Now that we know that relevant conduct can enter the sentencing calculation, the question
is whether it must enter the calculation. Stated alternatively, can a sentencing judge decline to
consider relevant conduct as a way to achieve an appropriate sentence level? The answer is no.
Consider the following from United States v. Hayes where the sentencing court ignored relevant
conduct:710
The presentence report (PSR) prepared before Hayes' sentencing concluded
that the crimes of which Hayes had been convicted cost the Government a total of
707
708
United States v. BilikiBrimah, 214 F.3d 854 (7th Cir. 2000).

1B1.1, cmt application note 1(a); see United States v. Salinas, 122 F.3d 5 (5th Cir.
1997).
709
United States v. Cruz-Camacho, 137 F.3d 1220 (10th Cir. 1998); United States v.
Coe, 79 F.3d 126 (11th Cir. 1996).
710
322 F.3d 792 (4th Cir. 2003).
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$75,814 (Indictment Losses). The PSR then estimated that the Government
suffered additional losses of $199,017 from 63 tax returns prepared by Hayes that did
not result in prosecution (Non-Indictment Losses). In computing Hayes' sentencing
range, the PSR included both the Indictment Losses and the Non-Indictment Losses
in Hayes' relevant conduct. See U.S. Sentencing Guidelines Manual section 1B1.3
(2000) (defining relevant conduct).
Before the sentencing hearing, Hayes filed written objections to the PSR.
With respect to the Non-Indictment Losses, he argued that (1) the 63 returns in
question were not part of his relevant conduct, (2) the value of the Non-Indictment
Losses was calculated improperly, and (3) consideration of the Indictment Losses
alone would result in an appropriate sentence under 18 U.S.C.A. section 3553(a)
(West 2000). The Government, responding in writing, disagreed with these assertions
and offered to introduce evidence in support of its position.
The Government did not have an opportunity to present this evidence. At the
beginning of the sentencing hearing, the district court ruled:
Given the facts in the pre-sentence report, I grant the defendant's
objections to the calculations of the tax loss amount. Even though
relevant conduct may be considered, The Court finds that a tax loss
amount of $75,814, the total loss amount for the counts charged in
the indictment, results in a sentence sufficient, but not greater than
necessary, to reflect the seriousness of the offense, provide just
punishment for an adequate deterrence, and to protect the public, in
satisfaction of [section 3553(a)].
J.A. 691. The Government noted an objection and proffered evidence to support its
assertions, but the court did not change its ruling. The effect of this ruling was to
reduce Hayes' base offense level from 16 to 14. See U.S.S.G. sections 2T1.4(a)(1),
2T4.1(I) & (K) (2000).
The Government asserts that the district court erred in refusing to consider
its evidence. Hayes counters that the court did not refuse to consider any evidence,
but instead found such evidence insufficient to demonstrate that the Non-Indictment
Losses resulted from relevant conduct.
We agree with the Government's position. The statements of the district court
do not reflect any inquiry whatsoever into the adequacy of the Government's
proffers. Instead, the ruling quoted above indicates that the court simply made a
personal assessment of what loss amount would result in an appropriate sentence,
without regard to the sentencing guidelines. However, [t]he relevant conduct
provisions are designed to channel the sentencing discretion of the district courts and
to make mandatory the consideration of factors that previously would have been
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optional. Witte v. United States, 515 U.S. 389, 402 (1995); see U.S.S.G. section
1B1.3(a) (providing that a defendant's offense level ordinarily shall be determined
on the basis of relevant conduct (emphasis added)). Thus, while the guidelines
preserve a broad range of discretion for district courts, a court has no discretion to
disregard relevant conduct in order to achieve the sentence it considers appropriate.
For these reasons, we must vacate Hayes' sentence and remand for further
proceedings. On remand, the district court must apply section 1B1.3 to determine
whether to treat some or all of the Non-Indictment Losses as part of Hayes' relevant
conduct. We take no position regarding the procedures the court must follow or what
its ultimate conclusion should be.
Just because the sentencing judge may not ignore relevant conduct in making the Guidelines
calculations, there may be a way for the parties to prevent a sentencing judge from acting on the
relevant conduct. In plea agreements, the parties usually address the sentencing factors, at least
those as to which the parties can reach agreement. Most of the time, the defendant and the
prosecutors will address relevant conduct and provide the basis for and tax loss related to relevant
conduct. But, assuming there is or could be relevant conduct, what if the parties do not address
relevant conduct in the plea agreement and, in their other submissions to the Probation Office and
the Court, do not say anything about relevant conduct? How will the sentencing judge know
anything about it and even if he suspects it be able to find the tax loss relevant conduct by the
required preponderance of the evidence? Now, that is not the way the Guidelines are supposed to
work. Certainly, if there is no doubt that the conduct in question clearly is relevant conduct and the
prosecutors could prove it, they are not supposed to walk away from it and not advise the Court.
Indeed, most plea agreements will caveat that, notwithstanding anything else if the plea agreement,
the prosecutors are free to meet their obligation to advise the sentencing judge of relevant sentencing
factors, including, of course, relevant conduct. But, sometimes, apparently, including the relevant
conduct may inhibit a defendants willingness to enter a plea agreement.
So, whats a prosecutor full of grace for the defendant supposed to do? I discuss one such
instance in my Federal Tax Crimes Blog which I cite in the footnote.711 Basically, the prosecutors
will not address the issue in the plea agreement but then, in the sentencing memorandum, the
prosecutors will advert in some way to the possibility of relevant conduct but decline to prove it.
A sentencing judge could perhaps force the issue and make the prosecutors cough up what they have
to see if it permits a determination of the relevant conduct. But, if the judge does not, the gambit
works because neither the sentencing judge, the defendant or the prosecutors complain. If the
gambit works, the net effect is the Guidelines calculations are understated and the defendant gets
a Guidelines calculations benefit. I do think that the Guidelines do not contemplated that result and
instead contemplate the relevant conduct will be included and any grace to the defendant will be
handled through Guidelines departures and Booker variances.
711
John A. Townsend, OK, Mr. Prosecutor, Why Are You Punting on the Relevant
Conduct? (11/11/11), Federal Tax Crimes Blog.
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Finally, relevant conduct can include conduct that was considered relevant conduct in a prior
sentencing, even if conceptually it might be considered double punishment.712 Thus, tax losses in
uncharged years considered relevant conduct in the prior proceeding might be considered relevant
conduct in the charged year.713 (OK, I do hope you are asking why somebody could have been so
stupid to continue such conduct, and the thought protestor might come to mind; but once you get
past that anti-defendant thought, it does seem at least unfair that the pile-on effect of relevant
conduct can be used in two separate prosecutions.)
I hope you can see why the concept of relevant conduct can be such a wild card in criminal
cases.
9.
Obstruction of Justice.
The sentencing level may be enhanced 2 levels for obstruction of justice. U.S.S.G., Section
3C1.1. The obstruction must have occurred during the investigation, prosecution or sentencing,
rather than as a part of the count(s) charged.714 For example, a defendant charged and convicted of
tax obstruction, 7212(a), where the obstruction is already reflected in his Base Offense Level
cannot be subject to the 2 level enhancement for obstruction of justice. Further, obstruction already
encompassed in the tax crime (say a Spies affirmative act of evasion designed to obstruct the IRSs
ability to discover the evasion) is not subject to the 2 level enhancement for obstruction of justice.
Application Note 4 of U.S.S.G. 3C1.1 provides many fairly obvious examples of obstruction
(such as intimidating a witness, suborning perjury, producing false documents, destroying
documents, etc.). One of the real dangers of going to trial and putting on some type of affirmative
defense (particularly via the defendant taking the stand) is the substantial risk that, if the defendants
affirmative defense is rejected by the jury, at sentencing the judge might impose an obstruction of
justice enhancement for asserting the defense.715
712
United States v. Morse, 613 F.3d 787, 796 (8th Cir. 2010).
Id.
714
See United States v. Clark, 316 F.3d 210, 213 (3d Cir. 2003). As of this writing, I
think this is the majority view, but Clark does discuss and find unpersuasive the Sixth Circuits
holding to the contrary in United States v. Sabino, 307 F.3d 446 (6th Cir. 2002), revised 307 F.3d
446 (6th Cir. 2012). The Government has attempted to distinguish Clark as a "very narrow holding
that applies only in cases in which the allegedly obstructive conduct is identical to the underlying
offense; the Third Circuit, however, rejected that distinction, finding that Clark held that
obstructive conduct need only be "part of the underlying charged offense" to avoid the 3C1.1
enhancement. United States v. Young, 2012 U.S. App. LEXIS 17974 n.2 (3d Cir. 2012).
715
See United States v. Ellis, 548 F.3d 539 (7th Cir. 2008) (the enhancement is not
warranted in every case of false testimony; the courts formulation seems to be that if the defendant
commits perjury in her defense, the enhancement can apply even though, presumably, the defendant
might be separately prosecuted and sentenced for the perjury; I suspect but have no empirical
evidence that the standard unelaborated denial of guilt by a defendant on the stand will not draw the
enhancement, but the elaborate, egregious lie will; note, also, that for the sentencing enhancement
713
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Courts may refuse to apply the enhancement if they think that the conduct inhered in or was
essential to one or more counts of conviction, for to do so would be double-counting (i.e., they were
considered in the basic offense of conviction for which a level of punishment is already provided).
Thus, in Sabino v. United States, 274 F.3d 1053 (6th Cir. 2001), the Court reasoned that: [A]
sentencing court may not apply the 3C1.1 enhancement if the application entails double-counting,
i.e., where the obstructive conduct is part and parcel of the underlying offense of conviction. In
Sabino, the alleged obstructive behavior -- false testimony before the grand jury -- was alleged by
the Government in the indictment and at trial as part and parcel of the conspiracy charge upon which
the defendant was convicted. The Court held that enhancing the sentence for obstruction of justice
would be double-counting, which is not permitted.
Moreover, merely changing a plea from guilty to not guilty is not an obstruction for
sentencing enhancement purposes, but if the defendant affirmatively lied in response to specific
question about the facts related to the plea (i.e., the plea is voluntary), a court might treat such
conduct as obstruction and only deny acceptance of responsibility but add the obstruction
enhancement.716
Finally, this enhancement applies to obstructive conduct during the investigation.717 IRS CI
often issues third party summonses in criminal tax investigations. As I note in the discussion of the
IRSs use of summonses, a taxpayer has a right to contest the summons but will almost always fail.
As I further note, many taxpayers assert grounds that have no realistic possibility of being accepted
by the court and appear to be using the proceeding to delay. In any event, if in hindsight the
sentencing court were to perceive that the taxpayer was inappropriately using his or her right to
contest the summons as a means to delay and hinder rather than assert bona fide issues, conceivably
a court could add this enhancement to the sentencing equation.
10.
Organizer or Leader.
3B1.1(a) provides for a four level enhancement to the offense level [i]f the defendant was
an organizer or leader of a criminal activity that involved five or more participants or was otherwise
extensive. There must be at least one knowing participant but participants who were not knowing
may be counted somehow under a functional equivalence test (the functional equivalent of an
activity involving five criminally responsible participants.)718 Many tax crimes are loner crimes
with only one or two persons (particularly husband and wife with respect to a joint return) at most
involved. However, tax preparers who violate 7206(2) may run into this enhancement if they
the Governments burden is preponderance of the evidence); see also United States v. Holmes, 406
F.3d 337 (5th Cir. 2005) (a nontax case).
716
United States v. Adam, 396 F.3d 327 (5th Cir. 2002).
717
The investigation for this purpose can be a civil investigation predicate to the
criminal investigation. United States v. McKinney, 686 F.3d 432, 437-8 (7th Cir. 2012).
718
United States v. Anthony, 280 F.3d 694, 698-701 (6th Cir. 2002).
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have at least one knowing participant and prepare many returns which are deemed equivalent to at
least 5 knowing participants.719
Returning to the husband and wife joint return situation. My experience is that this issue is
rarely raised and thus rarely decided in the run of the mill criminal tax case involving a joint return.
Often both spouses participate in the crime, usually with one spouse more culpable than the other.
Often in such cases, the disposition of the case is that the Government brings a charge only against
the more culpable spouse or, if both spouses are indicted, the Government accepts a plea from the
more culpable spouse and the charge(s) against the less culpable spouse are dismissed. Does that
mean that, at sentencing, the more culpable spouse is at risk of this adjustment?
The answer is yes, although often for one reason or another, the parties involved in the
sentencing process who might raise the issue the prosecutors, the Probation Office and the Court
do not focus on the culpability of the less culpable spouse. Where, however, they do focus on the
culpability of the less culpable spouse say after a trial in which that role of the less culpable spouse
is developed in the case to show the full background then this is a big risk. A sentencing judge
so found in a recent tax case,720 quoting a Seventh Circuit case as follows:
It is also irrelevant that the criminal participants happen to be husband and wife. The
guidelines contain no spousal exception; rather, 3B1.1(c) applies any time there is
more than one participant, regardless if the participants happen to be husband and
wife.721
Obviously, this risk is best mitigate by the more culpable spouse striking a plea before the
indictment, so that the less culpable spouse is not indicted and her role is not developed. If the plea
deal is struck after the indictment, all of those parties will be aware of the likely culpability of the
less culpable spouse and the real risk of an enhancement for leading the less culpable spouse is
present. Even worse, if only the more culpable spouse is indicted from the beginning and goes to
trial, developing the background necessary to obtain conviction may lay bare the role of the
unindicted less culpable spouse with the result that the issue almost certainly will be addressed.722
11.
Abuse of Position of Trust.
The Guidelines provide an upward adjustment if the defendant abused a position of public
or private trust in a manner that significantly facilitated the commission or concealment of the
offense. U.S.S.G. 3B1.3. A tax crime involving only the breach of the duty to the Government
719
See e.g., United States v. Embry, 2003 U.S. App. LEXIS 5526 (6th Cir. 2003)
(unpublished opinion).
720
United States v. Simon, 2011 U.S. Dist. LEXIS 26094 (ND IN 2011).
721
United States v. Herrera, 878 F.2d 997, 1002 (7th Cir. 1989).
722
That is what happened in United States v. Simon, 2011 U.S. Dist. LEXIS 26094 (ND
IN 2011), where the less culpable spouse had committed suicide which prevented her from being
indicted even if the Government had wanted to indict her.
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to report and/or pay tax does not invoke this upward adjustment, but if the tax crime involves or
arises from some other conduct that does breach a position of public or private trust, then this
upward adjustment may apply. Courts often apply a two-step analysis in determining whether this
breach is present: (1) whether the defendant occupied a position of public or private trust; and (2)
whether the defendant abused this position of trust in a way that significantly facilitated the
crime.723 For example, if the tax crime is failure to report embezzled income, this adjustment may
apply as well as the two level adjustment 2T1.1(b)(1) for illegal income and then, even , even
worse, a sentencing court may consider the nontax breach of trust conduct as a factor warranting an
upward variance.724
The Governments increased prosecutions for failure to pay over withheld taxes (often called
trust fund taxes) under 7202 raises the specter of increased application of this enhancement. At
least one court has affirmed, albeit in a nonprecedential decision, this enhancement over an
argument that the enhancement effectively double counts because abuse of a position of trust is
assumed in the underlying crime.725 Another court of appeals in a precedential decision declined the
enhancement reasoning that the defendant was not in a position of trust with respect to the victim
of the crime the IRS.726 The reasoning, perhaps stated cryptically, is that trust requires some degree
of discretion, and the defendant had none other than collect and pay over. Although commonly
referred to as a trust fund between the points of collection and pay over, it is really more like an
agency relationship than a trust relationship. Still, I think we can expect the Government to press
for inclusion of this enhancement in circuits where this issue is not yet settled.
723
United States v. DeMuro, 677 F.3d 550, 567 (3d Cir. 2012).
United States v. Brantley, 537 F.3d 347, 350 (5th Cir. 2008); United States v.
Williams, 517 F.3d 801, 810-11 (5th Cir. 2008) (holding that a district court may rely upon factors
already incorporated by the Guidelines to support a non-Guidelines sentence); see United States v.
Welch, 2010 U.S. App. LEXIS 19107 (5th Cir. 2010).
725
United States v. Lombardo, 281 Fed. Appx. 78 (3d Cir. Pa. 2008). But see United
States v. DeMuro, 677 F.3d 550, 567 (3d Cir. 2012) (with IRS arguing a special breach of trust
because of the special account to hold the trust fund tax in interim between collection by
withholding and payment to the IRS under 7512, but the Court rejecting that argument and
rejecting the position of trust enhancement; I think that DeMuro assumes a different result than
Lombardo).
726
United States v. May, 568 F.3d 597, 603-604 (6th Cir. Ohio 2009) (reaching a
different bottom-line conclusion than Lombardo because Lombardo had not addressed this
argument).
724
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12.
Restitution.
a.
General.
Restitution reimbursing the victim of the offense for the loss suffered may be imposed
by the court pursuant to two overlapping provisions, 18 U.S.C. 3663, the general restitution
provision, and 18 U.S.C. 3663A, the Mandatory Victim Restitution Act (MVRA).727 Restitution
is only allowed where it is specifically provided for by statute. Restitution, where authorized, takes
priority over fines. 18 U.S.C. 3572(b); U.S.S.G. 3.5E1.1(c). Mandatory restitution is only
permitted for losses related to the counts of conviction and not for any conduct that may be
considered as relevant conduct in calculating the sentencing range.728 However, in the case of a plea
agreement in tax cases, the Governments policy is to generally require contractual restitution for
the tax loss for both the pled counts and for counts that are dismissed pursuant to the plea.729
Finally, the sentencing court has discretion whether to make the restitution joint and several among
convicted defendants or apportioned between or among the defendants.730
One issue that has arisen is whether restitution is a penalty requiring a jury to find the
amount of the restitution beyond a reasonable doubt. Judges routinely determine restitution by a
preponderance of the evidence. But, based on a 2012 Supreme Court case, an argument can be made
(perhaps not a good argument) that the jury should decide restitution on the beyond a reasonable
doubt standard. This issue arises from Apprendi v. New Jersey, 530 U.S. 466 (2000) which has been
described in this context:
Apprendi stands for the proposition that, "[o]ther than the fact of a prior conviction,
any fact that increases the penalty for a crime beyond the prescribed statutory
maximum must be submitted to a jury, and proved beyond a reasonable doubt."
Apprendi, 530 U.S. at 490. "Statutory maximum" has been defined as "the maximum
sentence a judge can impose without additional jury findings." United States v.
727
See 18 U.S.C. 3556 (referencing 3663A and 3662; see also United States v.
Amato, 540 F.3d 153 (2d Cir. 2008). Restitution, although intended to compensate the victim, does
not make the victim a party to the sentencing proceeding in which restitution is imposed. The
sentencing court may hear from the victim and will certainly consider the victims claims. But, a
victim not satisfied with the restitution order has no standing to appeal. United States v. Stoerr, 695
F.3d 271 (3d Cir. 2012).
728
United States v. Batson, 608 F.3d 630 (9th Cir. 2010); United States v. Inman, 411
F.3d 591, 595 (5th Cir. 2005) (citing United States v. Mancillas, 172 F.3d 341, 343 (5th Cir. 1999)
(MVRA only permits restitution for the conduct underlying the offense for which he was
convicted.); and United States v. Nolen, 523 F.3d 331, 332 n. 2 (5th Cir. 2008); United States v.
Batson, 608 F.3d 630 (9th Cir. 2010).
729
See Attorney General Memo of May 2005, discussed in USAM Resource Manual,
Title 6, 18. Memorandum re Standard Language for Pleas and Orders in Criminal Tax Cases
Involving Restitution (this latter memorandum is published on DOJs web site.
730
18 U.S.C. 3664(h).
- 344 -
Seymour, 519 F.3d 700, 709 (7th Cir. 2008) (citing Blakely v. Washington, 542 U.S.
296, 303-04 (2004)). Other sentencing facts can be found by the district court using
a preponderance of the evidence standard. United States v. Kriegler, 628 F.3d 857,
863 (7th Cir. 2010). The recent trend, in order to circumvent later constitutional
concerns, has been to submit more facts to the jury. See United States v. Booker, 543
U.S. 220, 277-78 (2005) (Stevens, J., dissenting) ("In many cases, prosecutors could
avoid an [Apprendi] problem simply by alleging in the indictment the facts necessary
to reach the chosen Guidelines sentence.")
In the 2012 case, the Supreme Court applied Apprendi to fines imposed beyond the statutory
minimum permitted by the jurys findings.731 The question is whether that same analysis applies for
restitution? Are restitutions like fines in terms of the Apprendi analysis? At least one court thinks
that issue turns upon whether restitution is characterized as criminal or civil in nature, an issue
courts have addressed in other contexts.732 In those other contexts, the majority view is that
restitution is criminal in nature rather than civil, although there is a strong minority view to the
contrary.733 There will undoubtedly be quick developments in this area because restitution orders
are issued in many cases daily; the issue will quickly reach the courts of appeals and perhaps
resolved by the Supreme Court.734
Restitution imposed by criminal judgments is enforceable by civil collection means, subject
to certain exemptions.735 Further, restitution is a lien enforceable like a tax lien and may be filed like
a tax lien. Finally, restitution obligations are not subject to discharge in bankruptcy, and the
automatic stay provisions of bankruptcy do not preclude enforcement of restitution, including
revocation of probation.736
731
Southern Union Co. v. United States, U.S. , 132 S. Ct. 2344 (2012). In that case,
the statute permitted a fine of $50,000 per day, but the jurys finding was sufficiently limited that
it was read as finding on the minimum one day necessary for conviction. The Court held that the
jury would have to make that finding as to the number of days because the fine is a penalty. Note
that, in tax cases, the statute sets the fine for conviction and thus there is no basis or temptation to
impose more fines than the statute allows.
732
United States v. Wolfe, ___ F.3d ___, 2012 U.S. App. LEXIS 24937 (7th Cir. 2012).
733
Id.
734
My prediction is that restitution will withstand Apprendi analysis because restitution
is not penal; all it does is repair the monetary damage caused by the defendants convicted conduct.
735
18 U.S.C. 3613 (as to restitution, see particularly 3613 (c) and (f)). See United
States v. DeCay, 620 F. 3d 534, 541 (5th Cir. 2010).
736
United States v. Colasuonno, 697 F.3d 164 (2d Cir. N.Y. Oct. 12, 2012) (holding that
probation revocation proceedings for failure to pay restitution imposed as a condition of probation
are not subject to the bankruptcy automatic stay).
- 345 -
There are collateral consequences of restitution. Depending upon the nature of the
restitution, the defendant may be able to claim a deduction for some or all of the restitution.737
DOJ Guidelines require that, in negotiating plea agreements, the prosecutor must consider
requesting restitution for all victims for the counts in the indictment even if the plea is to a lesser
number of counts.738
Finally, restitution is generally thought to not violate the Eighth Amendments excessive
fines prohibition.739
b.
Restitution in Tax Cases.
The statute permits restitution to the victim in convictions under Title 18 and certain
specified other offenses, all of which are nontax offenses.740 Tax crimes under Title 26 are not
included among the offenses for which restitution is authorized in the statute. Restitution is thus not
allowed for a pure tax offense of conviction.741 Of course, if the count(s) of conviction includes a
Klein conspiracy or some other Title 18 offense, statutory restitution is permitted.742 For this reason,
the Government will usually charge false refund claims operations under the false claims act, 18
U.S.C. 286.743
That restitution is not allowed for tax crimes is not an anomaly. In tax cases, of course, the
victim is the United States and the harm is the tax not paid. The United States has elaborate
737
See Robert W. Wood, Deducting Restitution: Above or Below the Line, 127 Tax
Notes 1489 (June 28, 2010).
738
See United States Attorneys Manual, Title 6, Tax Resource Manual, 18,
Memorandum re Standard Language for Pleas and Orders in Criminal Tax Cases Involving
Restitution.
739
Restitution may be considered purely compensatory and thus not a fine; alternatively,
since it is compensatory, even if it has some punitive element, it is proportional to the offense, thus
satisfying the Eighth Amendment under United States v. Bajakajian, 524 U.S. 321 (1998). See
United States v. Lessner, 498 F.3d 185, 206 (3rd Cir. 2007); United States v. Dubose, 146 F.3d 1141,
1145 (9th Cir. 1998); and United States v. King, 2012 U.S. Dist. LEXIS 45949 (ED PA 2012).
740
There are a smattering of offense-specific restitution provisions outside 18 U.S.C.
3663, but none are tax offenses.
741
See United States v Minneman ,143 F.3d 274, 284 (7th Cir. 1998) reh, en banc, den.,
and cert den 526 US 1006 (1999) (citing United States v. Gottesman, 122 F.3d 150, 151 (2d Cir.
1997); United States v. Stout, 32 F.3d 901, 905 (5th Cir. 1994).).
742
CTM 44.02[1] & 44.02[2] (2008 ed.). 18 U.S.C. 3663. For cases discussing
restitution when this Title 18 hook into what is really a tax offense, see United States v Minneman
,143 F.3d 274, 284 (7th Cir. 1998) reh, en banc, den., and cert den 526 US 1006 (1999) (citing United
States v. Helmsley, 941 F.2d 71, 101 (1991), cert denied, 502 U.S. 1091 (1991)).
743
CTM 22.02[1] (2008 ed.) (Footnote omitted).
- 346 -
procedures for determining and collecting tax independent of the criminal system.744 As noted
above, this system will be engaged after the criminal case is concluded at least when the taxpayer
is the criminal defendant. The IRS will conduct such further investigation as necessary to determine
the correct civil tax liability and then send out a notice of deficiency for the taxes due. As also
noted, the amount the taxpayer may owe for civil tax purposes may be larger sometimes much
larger than the criminal number used in the prosecution or the tax loss number used for sentencing.
Accordingly, restitution is not available in tax cases except where the defendant consents to it in the
plea agreement.745
For the taxpayer defendant, the obligation of restitution for the tax evaded is, of course,
redundant with the underlying obligation (at least the portion of the tax obligation underpayment
or deficiency in tax speak -- attributable to fraud) and, as noted, the Government (via the IRS) has
elaborate mechanisms to determine and assess the amount of the tax and to collect the amount so
assessed. So the imperative to order restitution in the criminal phase, even if there is a required Title
18 offense, is not so great and sentencing for the Title 18 offense may just ignore restitution or state
generally that the taxpayer will pay the tax determined ultimately to be due. But, persons other than
the taxpayer may be convicted of tax crimes e.g., preparers or advisors may be convicted of
conspiracy to violate 7201 or 7206(2) related to other persons tax liabilities. In this case,
particularly where the Government is for some reason unable to collect from the taxpayer(s), the
Government may seek an order of restitution but must, as noted, have a Title 18 crime of conviction
to justify restitution. If the Government does seek restitution it will have to prove the amount of the
restitution. In the sentencing phase where this is relevant, the Governments proof is only the
preponderance of the evidence standard and not the beyond a reasonable doubt standard required
for conviction of the substantive criminal charges.746
744
See United States v Minneman ,143 F.3d 274, 285-6 (7th Cir. 1998) reh, en banc, den.,
and cert den 526 US 1006 (1999).
745
See Weinberger v. United States, 268 F.3d 346 (6th Cir. 2001); and United States v.
Anderson,543 F.3d 1072 (D.C. Cir. 2008) (permitting plea agreement restitution in what was then
the largest tax crime conviction even though (i) the plea agreement cited the wrong Title 18 section,
a phenomenon the Government urged and the court held was a scriveners error that did not vitiate
the parties meeting of the minds to agree to restitution; and (ii) the plea agreement did not state an
amount for restitution). In United States v. Hammond, 2008 U.S. App. LEXIS 10027 (6th Cir.
2008) (Unpublished), the Court found that the plea agreement contract restitution provision did not
state that the restitution amount was the proper tax liability and that it at most was ambiguous.
Hence, the defendant was permitted to contest the amount in the subsequent civil tax proceeding.
746
For an interesting even bizarre example of where an alleged victim, see United
States v. Jones, 2006 U.S. Dist. LEXIS 33806 (D. Conn. 2006). There, a CEO of a corporation, and
his spouse sought restitution after an employee of the corporation was convicted under 18 U.S.C.
1001 for representing to an IRS agent in an investigation of the corporation and its officers that
the CEO had filed returns with the IRS when he knew the CEO and his spouse had not filed returns.
The direct victim in a 1001 conviction is the United States. Nevertheless, the CEO and his spouse
alleged that, as a result of the false information, the CEO was subjected to an unnecessary criminal
investigation and incurred many unnecessary costs in a quite large amount. The Court declined their
- 347 -
Although the statute does not permit restitution in tax cases, the Court may provide
restitution in the following instances:
First, 18 U.S.C. 3663(a)(3) permits a court to order restitution if the parties agree to it. We
noted above that, usually in tax cases, the quantum of the underlying civil tax liability will not be
addressed in the criminal phase of the case.747 Sometimes, however, the underlying tax liability may
be addressed in the plea agreement. The plea agreement is a contract. It may be enforced as a
contract, and the sentencing court may include the agreements reached in the sentencing terms.
Thus, if the parties in the plea agreement provide for restitution, the court may impose that term.748
request to order restitution, reasoning (1) that the CEO was not the direct and proximate victim
of the 1001 offense for which the defendant was convicted; consequential damages that are not
direct and proximate are not within the scope of allowable restitution under either statute; (2)
restitution was not allowable under MVRA in any event because the offense was not an offense
against property; and (3) the resolution of a restitution claim would, for much the reason of its
remoteness to the offense of conviction, require to complex an inquiry beyond the record offered
for the offense of conviction. As a side note, the Government stipulated in the plea agreement that
restitution was not available. That stipulation was binding only on the Government. But, since this
was a title 18 offense of conviction, I suspect that the Government could have obtained restitution
if the CEO and his spouse had not been able to pay the taxes with respect to the years for which the
defendant had made the key misrepresentation.
747
The Court is required in setting the base offense level under S.G. 2T1.1(a)(1) and
the Tax Table at 2T4.1 to determine the tax loss number which is quantum of tax attributable to
taxpayers fraudulent conduct. See Application Note 1 (the definition of tax loss corresponds to
what is commonly called the criminal figures). This is not the same as the tax liability, but is only
the portion of the tax liability attributable to fraud. In any given case, of course, the taxpayer
amount attributable to fraud may be the entire amount of the tax liability. However, in most of the
cases I have seen, there are some civil adjustments that are not attributable to fraud and thus the tax
loss number will be less than the actual civil tax amount that the taxpayer underpaid. However, in
an unusual case, the Tax Court and the Eleventh Circuit on appeal held that, after an order of
restitution pursuant to a defendants commitment in the plea agreement, the amount ordered as
restitution bound the IRS in the subsequent civil proceedings. Creel v. Commissioner, T.C. Memo.,
affd 419 F.3d 1134 (11th Cir. 2005). I caution readers that Creel is aberrational. It appears that
Government Counsel in that case in the Tax Court did not do even a modicum of effort, including
calling a key witness, to show that the restitution the Government agreed to and then imposed by
the sentencing court was intended to settle the civil tax liability, so that the taxpayers
uncontradicted testimony that it was so intended stood essentially unchallenged. The Government
has instituted procedures to insure that the Creel aberration does not recur. See CC-2007-008,
reproduced at 2007 TNT 42-9 (also expressing disagreement with Creel); see also ILM 200734020,
2007 TNT 166-12 (distinguishing Creel). Still, under appropriate facts, counsel for a defendant
should be prepared to argue the case and perhaps even try to negotiate language in the plea
agreement that will preserve the opportunity to assert the argument.
748
See e.g., United States v. Miller, 406 F.3d 323 (5th Cir. 2005), cert. denied 126 S.
Ct. 207 (2005).
- 348 -
Usually, in the plea agreement the contract the Government will (i) include restitution not only
for the year of conviction but for relevant conduct years749 and (ii) not use language committing the
IRS to that amount as the ultimate civil tax liability (there may be noncriminal adjustments that
support a higher ultimate tax liability).750
Second, the court may impose restitution as a condition of some benefit that it is giving the
defendant, such as probation or supervised release under 18 U.S.C. 3583(d).751 If the defendant
wants the benefit, he has to accept the cost of the benefit.752 In a tax case, quantifying the amount
for restitution as a condition for supervised release could logically be viewed as the unpaid portion
of the tax loss (which may be the tax loss for the count(s) of conviction or even all relevant conduct
tax loss). The Fifth Circuit has, however, cryptically limited the scope of the amount that can be
required as a condition of supervised release as follows:
Restitution is not allowed under 3663 as part of the sentence in a federal tax
evasion case. Restitution to the IRS may be imposed as a condition of supervised
release under 3583, but only if "the specified sum of taxes . . . has [] been
acknowledged, conclusively established in the criminal proceeding, or finally
749
See discussion of this policy below.

Note that, although statutory restitution is limited to the tax for the years of conviction, thus
knocking out relevant conduct, the contractual agreement may include the relevant conduct years
(often the years for which counts in the indictment are dismissed pursuant to the plea agreement).
The contract governs.
750
DOJ CTM 5.01[7] (2008 ed.). The criminal tax process is not suited to determine
the actual civil tax liability. From the investigation through sentencing, the process is focused on
the criminal tax numbers (usually the same as the tax loss for sentencing). There may be any
number of difficult and uncertain civil tax adjustments that do not get resolved anytime during the
sentencing process and are better resolved later through the civil adjustment processes allowed the
IRS.
751
United States v. Batson, 608 F.3d 630, 634 (9th Cir. 2010) (The district court is
therefore authorized by 3563(b)(2) to order restitution as a condition of probation to the victim of
any criminal offense, including those in Title 26, for which probation is properly imposed.); United
States v. Nolen, 523 F.3d 331, 332 (5th Cir. 2008) (condition of granting supervised release); and
United States v. Dahlstrom, 180 F.3d 677, 686 (5th Cir. 1999); see also United States v. Miller, 406
F.3d 323 (5th Cir. 2005) (because defendant had consented to the restitution, the court declined to
reach the issue of whether, absent such consent, the sentencing court could order restitution).
752
However, in United States v. Miller, 406 F.3d 323 (5th Cir. 2005), cert denied 126 S.
Ct. 207 (2005), the defendant argued, in effect, that he could bifurcate the restitution from the
supervised release and, since he did not agree to restitution in the plea agreement, restitution could
not be imposed. The Court rejected that idea. The Court side-stepped the technical point Miller
raised by finding that his plea agreement did authorize the restitution imposed. Restitution as a
condition of supervised release may include years other than the year(s) of the count(s) of
conviction. See United States v. Johnson, 2011 U.S. App. LEXIS 22346 (5th Cir. 2011) (discussing
this aspect of Miller).
- 349 -
determined in civil proceedings." As the exact amount of taxes owed by Nolen was
not conclusively established at trial, restitution was inappropriate under 3583 as
well. In addition, the district court's order that Nolen comply with any IRS
requirements to pay delinquent taxes and penalties according to the schedule of
payments that the IRS imposes should serve the same purpose as restitution.
Accordingly, we reverse the district court's order of restitution and remand for
resentencing consistent with this opinion.753
Note the emphasis on conclusively established. Is that a higher burden than beyond a reasonable
doubt and what does conclusively established even mean? In any event, it certainly is a higher
burden than preponderance of the evidence which is the normal burden of proof for sentencing
matters. So, I am not sure I that the Fifth Circuit's language is not a just hyperbole which, like much
judicial hyperbole, may get repeated without any ultimate meaning.754
Moreover, as suggested in the quote, the district court can achieve most of the same effect
as restitution by ordering, as a condition of supervised release or pursuant to the plea agreement, that
the defendant file or correct past tax returns and pay any resulting tax.755 Such an order also requires
the defendant to satisfy an obligation he or she already has. And, since it is not restitution, the
Government cannot employ the collection tools that it would have available if it were restitution.756
But, practically, an order to comply with past tax obligations achieves most of the effects of an order
of restitution.757
753
United States v. Nolen, 472 F.3d 362, 382 (5th Cir. 2008).
Still, I suppose a court inclined to quote the language may be inclined to hold that
the Government has not met the hyperbolic burden.
755
In United States v. Thomas, 653 F.3d 13 (1st Cir. 2011), the First Circuit (i) held that
a district court can impose these obligations as a condition of supervised release, citing United States
v. Miller, 557 F.3d 919, 921-22 (8th Cir. 2009), and (ii) The district court was not ordering Thomas
to compensate the government for a loss suffered as a result of his criminal actions, though this is
a salutary side-effect of its order. See also United States v. Shaw, 2011 U.S. App. LEXIS 22916
(2d Cir. 2011) (distinguishing United States v. Gottesman, 122 F.3d 150 (2d Cir. 1997) where the
courts order was generic to pay past due taxes as agreed in the future between the defendant and the
IRS).
756
I note below in the text that Congress has provided for the IRS to be able to assess
promptly and collect the amount in tax restitution orders in some cases. The IRS cannot do that if
the obligation is a general order to comply with past tax filing and payment obligations, and the IRS
will then have to go through the Code procedures predicate to assessment issuing a notice of
deficiency permitting the taxpayer to litigate in the Tax Court prior to assessment.
757
See United States v. Thomas, 653 F.3d 13 (1st Cir. 2011) (The district court was not
ordering Thomas to compensate the government for a loss suffered as a result of his criminal actions,
though this is a salutary side-effect of its order.).
754
- 350 -
DOJ Tax has a policy that prosecutors must consider including a restitution requirement
in the plea agreement for a criminal tax case.758 Further, restitution is the rule rather than the
exception and is available by plea agreement in virtually every criminal tax case.759 This means that
restitution will be included barring some compelling reason not to.760 Furthermore, the contractual
restitution will include not only the amount for the agreed count(s) of conviction, but also taxes for
the dismissed counts and perhaps even relevant conduct for noncharged years (although as noted
above there are practical considerations mitigating the inclusion of noncharged years). The purpose
of this restitution requirement is to give the Government immediate access to collection of the
amount specified without having to go through the predicate procedural requirements to assess the
tax liability and collect it. This may not be all bad because it may lay the foundation, by prepayment
before sentencing, for a finding extraordinary restitution which is a favorable sentencing factor. But,
there may be one downside to contractual restitution for taxes; the IRS apparently takes the position
that the restitution amount even though for the tax liability and applied to the tax liability, is not
itself a tax liability that is subject to the procedures that permit the IRS to compromise tax
liabilities.761 This means that, if the taxpayer foregoes or can forego contractual restitution in the
plea agreement, he or she may be able to do an offer in compromise for the resulting civil tax,
penalties and interest, but cant do that if it is contractual restitution.
Even in the absence of restitution, prudence may dictate that the civil tax liability be resolved
(if possible) and paid prior to sentencing, if possible, in order to strengthen the argument that the
defendant qualifies for the acceptance of responsibility downward adjustment.
Amounts paid as restitution for taxes are applied to the taxpayers tax liabilities for the
year(s) to which the restitution applies.762 Notwithstanding that the restitution is applied against
those taxes, the restitution and payment itself is not a determination and assessment of the tax
liability and the IRS must independently determine and assess the liability.763
758
The Attorney Generals Guidelines state that In all plea discussions, prosecutors
must consider requesting that the defendant provide full restitution to all victims of all charges
contained in the indictment or information, without regard to the counts to which the defendant
actually plead[s]. CTM 44.01 (2008 ed.) (citing Attorney General Guidelines for Victim and
Witness Assistance, Art. V(D) (May 2005); and Principles of Federal Prosecution, USAM
9-27.230, .420-430)). See also USAM 6-4.370; and USAM Resource Manual Title 6, Tax Resource
Manual, 18. Memorandum re Standard Language for Pleas and Orders in Criminal Tax Cases
Ordering Restitution (added September 2006).
759
CTM 44.01 (2008 ed.).
760
As to botched attempts to include such contractual restitution, see p. 347, fn. 745,
supra.
761
See ECC 200909051, IRS email advice, reproduced at 2009 TNT 38-81.
762
Morse v. Commissioner, 419 F.3d 829, 834 n.4; United States v. Helmsley, 941 F.2d
71, 102 (2d Cir. 1991) ([W]e believe it is self-evident that any amount paid as restitution for taxes
owed must be deducted from any judgment entered for unpaid taxes in . . . a civil proceeding.); see
ILM 200734020, 2007 TNT 166-12.
763
See ILM 200734020, 2007 TNT 166-12.
- 351 -
In the section immediately below I discuss fines, but some courts have used fines as a
substitute for restitution in tax cases. In a recent 7202 case involving unpaid taxes withheld from
employees, the tax loss substantially exceeded the indicated fine range under the Sentencing
Guidelines. The sentencing court noted that it could not order restitution but, at the Governments
request, could impose a fine outside the Guidelines range, based upon 3571's grant of authority
to impose an alternate fine based upon gain to the defendant.764
Restitution (whether for taxes or otherwise) may be enforced under the Federal Debt
Collection Practices Act (FDCPA).765 The Governments ability to enforce restitution under the
FDCPA is made subject to the Consumer Credit Protection Act (CCPA), but if the restitution is
for taxes, the garnishment restrictions of the CCPA are not applicable.766
Finally, Congress amended the Code in 2010, to make the amount ordered for restitution of
tax immediately assessable and collectible without the usual predicate notice of deficiency.767 The
IRS is required to assess the restitution amount once the criminal judgment becomes final.768 A
notice of deficiency is not required as a predicate to assessment of the restitution amount.769 The
defendant / taxpayer may not thereafter contest civilly the tax restitution amount so assessed.770
Although it is clear that the provision applies to tax restitution ordered for a count of conviction
under Title 26 (the Internal Revenue Code), it is perhaps not clear that the provision applies to tax
restitution for a count of conviction under Title 18 or, for that matter, an FBAR count of conviction
764
United States v. Ellis, 548 F.3d 539 (7th Cir. 2008). Note that for this type of tax
liability, the IRS certainly could have assessed the tax against the defendant under 6672, so it had
the usual tax tools to collect the tax from the defendant. It is unclear from the cryptic Court of
Appeals decision why the Government felt that using the power to depart from the Guideline fine
was appropriate in that particular case. The reason this is important is that unexplained use of the
fine power would seem to be contrary to the intent of Congress not to require restitution in tax cases.
765
18 U.S.C. 3664(m)(1); see United States v. Phillips, 303 F.3d 548, 550-51 (5th Cir.
2002); and United States v. Clayton, 615 F.3d 592 (5th Cir. 2010).
766
United States v. Clayton, 615 F.3d 592 (5th Cir. 2010).
767
3(a) of P.L. 111-237, effective for restitution orders entered after August 16, 2010.
768
6201(a)(4)(A) & (B), as added by 3(a) of P.L. 111-237. However, apparently
because the statutory language in 65011(c)(11), dealing with these tax restitution assessments, is
the same as the unlimited civil statute for fraud in 6501(c)(1), there is no statute of limitations on
assessing restitution for tax. See ECC 201221014 (3/21/2012), reprinted at 2012 TNT 103-73. This
may not be important, given the authority to assess immediately, which the IRS will surely do in all
except rare cases.
769
6213(b)(5), , as added by 3(a) of P.L. 111-237 .
770
6201(a)(4)(C), as added by 3(a) of P.L. 111-237 .
- 352 -
under Title 31.771 These provisions allow the IRS to use its powerful nonjudicial collection tools
(lien and levy) to collect the tax underlying an order of restitution of taxes.772
In all events, if the IRS has not assessed the tax previously, it will do so after the criminal
conviction whether it does so under this special expedited assessment procedure or otherwise.
Once assessed, the IRS will have the full range of enforced collection measures available for
collection of a tax, including filing notice of liens, levies and judicial suits to reduce the tax to
judgement and/or foreclose on property.773
13.
Fines.
You will recall that the various Code provisions provide maximum fines in addition to
maximum incarceration periods. As noted in the introductory materials, the CFEA overrides these
by providing higher potential fines as follows:
3571. Sentence of fine
(a) In general: A defendant who has been found guilty of an offense may be
sentenced to pay a fine.
(b) Fines for individuals: Except as provided in subsection (e) of this section,
an individual who has been found guilty of an offense may be fined not more than
the greatest of:
(1) the amount specified in the law setting forth the offense;
(2) the applicable amount under subsection (d) of this section;
(3) for a felony, not more than $250,000;
(4) for a misdemeanor resulting in death, not more than $250,000;
(5) for a Class A misdemeanor that does not result in death, not more
than $100,000;
(6) for a Class B or C misdemeanor that does not result in death, not
more than $5,000; or
771
See IRS document CCA-111811-10, which is an IRS email with attached outline for
a presentation within the IRS. This is not an official pronouncement from the IRS and the author
of the outline is not identified. It is therefore not clear that this is anything like an authoritative
interpretation of the statute. The outline states: Our interpretation is that the assessed amount is
limited to losses attributable to Title 26 violations and does not include Title 18, tax-related
charges. I have questioned this interpretation in my blog titled New Statute for Civil Effect of
Restitution in Tax Cases (at Least Title 26 Crimes of Conviction).
772
For additional nuances of the statute, see my Federal Tax Crimes Blog titled New
Statute for Civil Effect of Restitution in Tax Cases (at Least Title 26 Crimes of Conviction)
(2/11/11).
773
Section 6334(a) lists property exempt from levy. Not much is exempted. For
example, despite ERISAs Anti-Alienation provision for many types of retirement plans, the IRS
can collect tax from such plans. See for further discussion my Tax Procedure Blog entry titled,
Restitution And Tax Collection from Retirement Accounts - Anti-Alienation (11/28/12).
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(7) for an infraction, not more than $5,000.

(c) Fines for organizations: Except as provided in subsection (e) of this
section, an organization that has been found guilty of an offense may be fined not
more than the greatest of:
(1) the amount specified in the law setting forth the offense;
(2) the applicable amount under subsection (d) of this section;
(3) for a felony, not more than $500,000;
(4) for a misdemeanor resulting in death, not more than $500,000;
(5) for a Class A misdemeanor that does not result in death, not more
than $200,000;
(6) for a Class B or C misdemeanor that does not result in death, not
more than $10,000; and
(7) for an infraction, not more than $10,000.
(d) Alternative fine based on gain or loss: If any person derives pecuniary
gain from the offense, or if the offense results in pecuniary loss to a person other than
the defendant, the defendant may be fined not more than the greater of twice the
gross gain or twice the gross loss, unless imposition of a fine under this subsection
would unduly complicate or prolong the sentencing process.
****
The sections following 3571 should also be reviewed for certain nuances in application of
the fines. Suffice it to say for present purposes that, for tax cases, the maximum fines imposed under
3571 are greater than those under the general tax statutes ( 7201 ff.) and are not exempt under
subsection (e). The sentencing guidelines then tell us how to impose the fines up to the maximum
thus provided in the statute:
The Guidelines provide a table, similar in methodology to the sentencing
table, to determine the range of appropriate fines U.S.S.G. 5E1.2. These ranges
apply to tax cases, provided that the fines do not exceed the statutory maximums.
The Supreme Court recently held that fines are subject Apprendi analysis which requires that
the jury determine the fines, just as it must determine guilt unless the fine impose is necessarily
subsumed in the finding of guilt.774
Although beyond the scope of this discussion of fines in tax cases, I think it worth
mentioning that a prominent economist Gary Becker, a Nobel prize winner in economics
theorizes that, for economic crimes, such as tax crimes, economic punishment most prominently
fines should play a more prominent role in sentencing than incarceration.775 Under the Sentencing
774
Southern Union Company v. United States, ___ U.S. ___, 2012 U.S. LEXIS 4662
(2012).
775
Gary S. Becker, Crime and Punishment: An Economic Approach (1974), is available

on the web here: http://www.nber.org/chapters/c3625.pdf; see also Mahmoud Bahrani, The
economics of crime with Gary Becker (The Chicago Maroon 5/25/12), available here:
- 354 -
Guidelines and the statutes authorizing fines (see above), incarceration is the punishment that takes
precedence, particularly in the case of major economic crimes where, relative to the losses, the fines
authorized are not that great. Professor Becker claimed recently that this economic approach to
punishment is gaining currency.776 In one recent case, a sentencing judge attempted to apply
Beckers concept in a tax case.777 In the case, the Guidelines indicated a sentencing range of 63-78
months, but the sentencing judge sentenced to 1 day (actually 1 day on each of two counts, with the
1 day sentence to be served concurrently, so 1 day of incarceration). The sentencing judge ordered
fines of $350,000 on one count of money laundering and $100,000 on the tax count (tax perjury).
But that was not enough, the judge felt, under Beckers theory to punish the crime. So, the
sentencing judge ordered $3,500,000 in restitution to the charitable Foundation that the defendant
stole money from. The sentencing judge specifically based this unusual tap on the wrist and heavy
economic payment on Professor Beckers theory. The problem is that restitution can be ordered
only for loss to victims from counts of conviction, so the sentence was reversed on appeal.778 On
remand, of course, the sentencing judge will not have the massive economic sanction in the guise
of restitution to justify a minimal incarceration period, so it is likely that he will go with what he has
punishment via significant incarceration. The takeaway point, however, is that, perhaps in
appropriate cases buying into Beckers economic theory of punishment, a pitch can be made to the
sentencing judge to mitigate the incarceration time particularly where counts could be pled that
permit restitution and/or the authorized fines are significant in relation to the loss arising from the
conduct being sentenced.
14.
Costs of Prosecution.
Most of the significant tax crimes in the Code require in the statute defining the crime that
the convicted defendant pay the costs of prosecution.779 These are evasion 7201, tax perjury
7206(1), aiding and assisting 7206(2) and failure to file 7203. The significant omission is for
tax obstruction 7212, which may reflect its parentage in Title 28 which generally does not require
that the convicted defendant pay the costs of prosecution.780 The imposition of costs of prosecution
in tax cases has withstood constitutional attack, including the claim that the threat of costs being
http://chicagomaroon.com/2012/05/25/the-economics-of-crime-with-gary-becker/
776
See the interview in the preceding footnote. However, for another prominent
scholars concerns about quantifying in economic terms important societal values, see Michael J.
Sandel, What Money Cant Buy: The Moral Limits of Markets (Farrar, Straus and Giroux April 24,
2012).
777
United States v. Ciccolini, 2012 U.S. App. LEXIS 13636 (6th Cir. 2012).
778
Id. Both parties appealed on this basis.
779
CTM 43.12[2] (2008 ed.).
780
Most of the other tax crimes have this provision, but some do not. For example,
7205, fraudulent withholding exemption, does not contain the costs of prosecution provision, and
thus such costs cannot be imposed. United States v. Ducharme, 505 F.2d 691 (9th Cir. 1974).
- 355 -
imposed upon convictions chills a defendants right to a full and fair trial by increasing the financial
risks of longer trials.781
The provision is mandatory782 and the CTM says that costs of prosecution should be sought
in tax cases.783
Costs of prosecution do not include the costs of the investigation leading to the indictment,784
but do include, for example, costs of transportation and subsistence for an IRS agent as principal
witness.785 And, if there is conviction on multiple counts, some of which have mandatory costs of
prosecution assessments and others which do not, all of the prosecution costs are not assessable.786
And the Government has remedies available, including garnishment, to collect the assessment of the
costs.787
15.
Sentencing Within the Range and Departures.

a.
Introduction.
I refocus on departures here to present some additional factors related to departures.

Departures are covered in Chapter 5, Part K, which splits the discussion into substantial assistance
Departures and Other Departures. Some prohibited or discouraged factors in determining where
within the range to sentence and whether to depart are set forth in other related Guidelines. I address
them in that order but discuss only those that are relevant to tax crimes.
781
United States v Chavez, 627 F.2d 953 (9th Cir. 1980, cert den 450 U.S. 924 (1981)
( 7203 prosecution) (good discussion); United States v. Fowler, 794 F.2d 1446 (9th Cir. 1986);
United States v. Palmer, 809 F.2d 1504 (11th Cir. 1987).
782
United States v Chavez, 627 F.2d 953, 954 (9th Cir. 1980, cert den 450 U.S. 924
(1981) ( 7201, failure to file, conviction; has a good history of the costs of prosecution provision);
United States v. Wyman, 724 F.2d 684 (8th Cir. 1984) (following Chavez); United States v. Fowler,
794 F.2d 1446 (9th Cir. 1986).
783
CTM 43.12[2] (2008 ed.), by reference to USAM 6-4.350 (Thus, the United States
Attorney should seek recovery of the costs of prosecution in criminal tax cases.). Notwithstanding
that mandate, my anecdotal evidence is that recovery of these costs are not routinely sought,
particularly in cases where a plea is timely made.
784
United States v. Vaughn, 636 F.2d 921 (4th Cir. 1980); see also United States v.
Bussell, 414 F.3d 1048, 1060-1061 (9th Cir. 2005), citing United States v. Gordon, 393 F.3d 1044,
1051 (9th Cir. 2004); United States v. Fowler, 794 F.2d 1446, 1449 (9th Cir. 1986).
785
United States v. Dunkel, 900 F.2d 105 (7th Cir. 1990).
786
United States v. Bussell, 414 F.3d 1048, 1060 (9th Cir. 2005).
787
See United States v. Hall, 2011 U.S. Dist. LEXIS 2911 (D. ME. 2011) (with an
interesting discussion of the statutes for collecting the civil sanctions such as restitution, fines and
costs of production).
- 356 -
As you undoubtedly have perceived from the discussion of the Guidelines to this point, the
factors considered in determining the Guideline range do not necessarily in every given case produce
the right result for sentencing. The particular case may present factors relevant to sentencing that
were not adequately balanced in the Guidelines calculations or were not even considered at all. On
the other hand, there may be factors that for policy or constitutional reasons should not be
considered in determining where, within or without the Guidelines, the sentence should be imposed.
b.
Factors That May or May Not Be Considered.
In determining where, within or without the ranges, to impose sentence, the Guidelines
provide rules whether certain factors are allowed, encouraged, prohibited or discouraged. The
following is a brief summary of these factors relevant to tax crimes.
(1)
Diminished Capacity.
Nothing in the Guidelines to this point deals with the issue of mental capacity. Of course,
if the defendant is sufficiently impaired that he or she cannot have willfully committed the tax
crime, the defendant will not be guilty. But, our society does believe that in some cases short of
inability to commit a crime, diminished capacity might be a basis for mitigating punishment.
Diminished capacity may thus be considered by the court in sentencing within the range and even
in departing downward.788 Thus, alcoholism or drug use may be a mitigating factor justifying a
downward departure.
(2)
Voluntary Disclosure.
A defendants voluntary disclosure of the offense prior to its discovery when its discovery
was unlikely may justify a downward departure.789 This is rarely an issue in a tax case. You should
note that this is not the same thing as a voluntary disclosure under the IRS or DOJ Tax policies
discussed above.
(3)
Aberrant Behavior.
A downward departure may be given in an extraordinary case if the defendants criminal

conduct constituted aberrant behavior.790 Aberrant behavior is defined as a single criminal
occurrence or single criminal transaction that (A) was committed without significant planning; (B)
was of limited duration; and (C) represents a marked deviation by the defendant from an otherwise
law-abiding life.791 Since, in the general run of the mill tax case, DOJ Tax will not bring an isolated
charge case (e.g., in tax evasion or tax perjury cases, it prefers at least two years even if a plea is
taken for only one year), this is rarely encountered in a tax case.
788
789
790
791
5K2.13.
5K2.16.
5K2.20.
Application Note 1.
- 357 -
(4)
Dismissed or Uncharged Conduct.
The sentencing court may consider dismissed or uncharged conduct that did not enter into
the determination of the Guideline range.792 You will recall that acquitted, dismissed or uncharged
conduct can be considered under the concept of relevant conduct and therefore included in the tax
loss number which sets the Base Offense Level. So, if it is already considered, it will not be counted
twice.
(5)
Age.
Age is generally not a factor that should be considered, but may be considered for downward
departure where the defendant is elderly and infirm and where a form of punishment such as home
confinement might be equally efficient as and less costly than incarceration.793
(6)
Educational and Vocational Skills.
These are not normally relevant to a departure.794

(7)
Physical Condition.
Generally, physical condition is not relevant to a departure. However, extraordinary physical

impairment may justify a downward departure.795
(8)
Family Ties and Responsibilities.
Family ties and responsibilities are not normally relevant in determining departures, but may
be considered for purposes of the fine or, if permitted, restitution.796 Notwithstanding this general
rule, a sentencing judge may depart based on truly exceptional family responsibilities and be
sustained on appeal.797 This is perhaps an area in which sentencing judges departures may be
more easily sustainable under Bookers interpretation of the Guidelines considered as advisory
rather than mandatory.
792
5K2.20.
5H1.1. For a pithy comment on age as a factor in sentencing, see Judge Posners
opinion in United States v. Johnson, ___ F.3d ___, 2012 U.S. App. LEXIS 13893 (7th Cir. 2012).
794
5H1.2.
795
5H1.4.
796
5H1.6.
797
United States v. Leon, 341 F.3d 928 (9th Cir. 2003).
793
- 358 -
(9)
Race, Sex, National Origin, Creed, Religion and

Socio-Economic Statutes.
These may not be considered in either sentencing or in departing.798

(10)
Effect of Booker.
Although I am discussing the Guidelines here, I do want to caution that these factors that
might or not be considered for departures, upward or downward, have been rendered obsolete from
a practical perspective:
Johnson's framing of the issue as one about departures has been rendered
obsolete by our recent decisions applying Booker. It is now clear that after Booker
what is at stake is the reasonableness of the sentence, not the correctness of the
departures as measured against pre-Booker decisions that cabined the discretion
of sentencing courts to depart from guidelines that were then mandatory. Now,
instead of employing the pre-Booker terminology of departures, we have moved
toward characterizing sentences as either fitting within the advisory guidelines range
or not.799
So, in arguing factors for overall reasonableness of a sentence, the parties can assert even the
Guidelines-prohibited factors and, indeed, as to those factors that as noted above might be
considered, they can still be relevant to overall reasonableness under Booker.
c.
Sentencing Within the Ranges.
Generally, the judge has discretion to sentence within the Guideline Ranges, provided that
he or she does not rely upon some prohibited factor or not understand his legal authority to depart
in appropriate cases.
d.
Sentencing Outside the Ranges -- To Depart or Not to

Depart.
(1)
Substantial Assistance Departures.
The sentencing court may depart downward if the defendant has provided substantial
assistance in the investigation or prosecution of another person who has committed an offense.
There are two provisions that deal directly with such a departure. First, U.S.S.G. 5K1 provides a
departure. Second, Rule 35(b) provides substantial assistance benefit which substantially parallels
the 5K1 departure. These provisions are stated in similar language and, thus, interpreted
798
799
5H1.6.
United States v. Johnson, 427 F.3d 423, 426 (7th Cir. 2005).
- 359 -
consistently.800 A sentence that improperly does not include a substantial assistance departure may
also be collaterally attacked in some cases under 28 U.S.C. 2255.801
The substantial assistance departure is different from the level reduction adjustment for
acceptance of responsibility discussed above. Substantial assistance is assistance in nailing someone
else. A defendant is not required to affirmatively assist the Government in order to qualify for
acceptance of responsibility. This basis for departure is thus designed to give the defendant an
incentive to cooperate.
Tax crimes tend to be loner crimes in which the culpable parties, if more than one are
involved (usually a husband and wife), are initially identified in the Governments investigation and
are investigated and prosecuted simultaneously. The circumstances in these usual cases are such
that one of the defendants is unlikely to turn upon the other, but at least conceivably a defendant in
the cross-hairs might be able to deliver up one or more persons involved in unrelated crimes and thus
potentially qualify for a departure.802 And, some tax and tax related crimes such as the massive
crimes involved in the various fuel tax scams or in abusive trust or other tax shelter schemes offer
the players some opportunity to provide substantial assistance in delivering up others involved in
related crimes. In these cases, a target may be in a real position to take advantage of this basis for
departure.
These departures require that the Government file a motion for a departure. The Government
may be in a position upon sentencing to file the motion. Sometimes, however, this type of assistance
is rendered after the defendant pleads guilty and is sentenced; in this case, the Government must
move for this reduction within one year (generally).803
The Governments refusal to move for this departure is not reviewable, unless based on a
constitutionally impermissible factor.804 Constitutionally impermissible factors include the obvious
suspects such as race. But, a constitutionally impermissible factor also includes exercising the right
800
United States v. Mulero-Algarin, 535 F.3d 34, 38 (1st Cir. 2008) (In charting the
contours of substantial assistance under Rule 35(b), courts have consistently looked to the virtually
identical language contained in USSG 5K1.1.)
801
See United States v. Richardson, 558 F.3d 680 (7th Cir. 2009) (Posner, J.) (where,
although acknowledging remarkable cooperation, the Government refused to file a Rule 35(b)
request unless the defendant waived his right to appeal from the conviction; Judge Posner
characterized the motion styled as a Rule 35(b) motion as being in substance a proceeding under
2255). Section 2255 is the statutory descendant of the common law writ of habeas corpus. For a
good summary, see Allan Ellis and James H. Feldman, Jr., A 2255 and 2241 Primer, 26 Champion
26 (2002).
802
For an example where the Government was willing to move for such a departure
where information of unrelated crimes was given provided that the Defendant meet a condition he
refused to meet, see United States v. Richardson, 558 F.3d 680 (7th Cir. 2009).
803
FRCrP Rule 35(b)(1); Guideline 5.K.1.1.
804
Wade v. United States, 504 U.S. 181 (1992).
- 360 -
to trial if the defendant is able to show that the prosecution vindictively refused to file the motion
to punish for exercising the right to trial rather than pleading guilty.805 A motive not rationally
related to a legitimate governmental purpose may also be prohibited.806 But, courts give the
Government considerably leeway in determining what is a legitimate governmental purpose.807 And,
in the face of a facially adequate Government explanation, a defendant desiring relief must make
a substantial threshold showing of impropriety before obtaining discovery or a hearing.808
Provided that the putative cooperation is incident to a plea agreement, the issue should be
addressed in the plea agreement which, as a contract,809 may commit the Government to file the
motion. Indeed, even where, as usual when the defendant has little bargaining power, the plea
agreement gives the Government sole discretion as to whether to file the departure motion,810 some
805
See United States v. Dorsey, 512 F.3d 1321, 1325-6 (11th Cir. 2008), citing United
States v. Khoury, 62 F.3d 1138, 1141 (9th Cir. 1995); United States v. Paramo, 998 F.2d 1212,
1219-20 (3d Cir. 1993); United States v. Easter, 981 F.2d 1549, 1555 (10th Cir. 1992) and stating:
While the government may refuse to file a 5K1.1 for many reasons, and it is within
the governments discretion to do so, [t]o punish a person because he has done what
the law plainly allows him to do is a due process violation of the most basic sort.
[citing Bordenkircher v. Hayes, 434 U.S. 357, 363 604 (1978).]
806
United States v. Mulero-Algarin, 535 F.3d 34, 38-40 (1st Cir. 2008), citing Wade v.
United States, supra, p. 186.
807
In United States v. Richardson, 558 F.3d 680 (7th Cir. 2009), the court held that
imposing a condition requiring the defendant to not appeal his underlying conviction was rationally
related to a legitimate government end. I have not attempted to try to reconcile an apparent
inconsistency between this holding and the contrary holding as to a condition that the defendant
waive his right to trial, and the court did not address them (although noting that a condition of
waiver of appeal is is little different from a defendants agreeing to plead guilty, which entails a
waiver of his right to a trial, and to an appeal if he loses at the trial). In Richardson, Judge Posner
gives the Government broad contractual latitude to impose conditions on the request for substantial
assistance departure, noting inter alia, that the Government can impose a condition that the
defendant not sue the Government even with respect to Bivens or other civil rights constitutional
claims. Thus, it would appear that conditions inconsistent with only the most basic constitutional
rights might be deemed improper under Judge Posners analysis.
808
United States v. Mulero-Algarin, 535 F.3d 34, 39 (1st Cir. 2008).
809
Santobello v. New York, 404 U.S. 257 (1971).
810
A typical substantial assistance provision offered by the Government is:
d) At this time the USAO makes no agreement or representation as to whether any
cooperation that defendant has provided or intends to provide constitutes substantial
assistance. The decision whether defendant has provided substantial assistance rests
solely within the discretion of the USAO.
As reported in an options backdating case on the Law Professors Blog on 12/4/07. In this instance,
this more or less standard substantial assistance was accompanied by perhaps some relief for the
defendant in the form of the following:
e) The USAO's determination of whether defendant has provided substantial
- 361 -
courts of appeals allow review for bad faith in the Governments exercise of its discretion.811
Obviously, in negotiating the plea agreement, you should know what your client can deliver in terms
of substantial assistance and will want to draft as tight language as possible qualifying your client
for the departure if he delivers. Depending upon the language you can negotiate, you may be able
to force the Government to make the motion or at least have the issue reviewed if the Government
does not.
(2)
Other Guidelines Departures.
S.G. 5K2.0 provides for other departures from the applicable guideline range based on
offense characteristics or offender characteristics of a kind, or to a degree, not adequately taken into
consideration in determining that range.812 This is a catch all, where the authors of the Guideline
felt that all such circumstances could not be comprehensively listed and analyzed in advance and
must be left to case-by-case determination.
Here are some other examples (by no means exhaustive) of special factors justifying a
downward departure.
(1) Harm to Third Parties. In United States v. Olbres,813 the Court considered the detrimental
effect that incarceration would have on the defendants business and its employees.
(2) Tax Loss Overstates Seriousness of Offense. In Brennick v. United States,814 the Court
approved a departure where the taxpayer sought only to defer payment rather than ultimately avoid
payment but required the district court to provide a more adequate explanation of the departure.
(3) Lack of Sophistication. I noted above that sophistication can increase the base offense
level. An unusual lack of sophistication has been used to justify a downward departure.815
assistance will not depend in any way on whether the government prevails at any
trial or court hearing in which defendant testifies.
811
The Government cannot refuse to file the motion if a constitutionally impermissible
factor such as race or sex was material to the decision. Wade v. United States, 504 U.S. 181,185-6
(1992) (even in absence of a plea agreement, federal . . . courts have authority to review a
prosecutor's refusal to file a substantial-assistance motion and to grant a remedy if they find that the
refusal was based on an unconstitutional motive.) For further discussion of the issue of any
obligation of good faith on the Government with respect to the 5K1 motion, see below (beginning
on p. ?) the discussion of the contractual nature of plea agreements.
812
Application Note 2.A., citing 18 U.S.C. 3553(b).
813
99 F.2d 28 (1st Cir. 1996).
814
134 F.3d 10 (1st Cir. 1998).
815
United States v. Jagmorhan, 909 F.2d 61 (2d Cir. 1990).
- 362 -
(4) Physical Conditions. Conditions such as age, health, reduced mental capacity, etc. may
be urged as reasons to depart.816
(5) Extraordinary Good Works. This is a dicey ground for departure as to which some courts
do and some dont. But those that do disavow that merely writing checks will suffice and want to
see some very extraordinary level of personal commitment of time and energy (as well as financial
works).817
In the process of urging the sentencing court to make a downward departure, it is important
to first sell the downward departure to the prosecutor if possible. If the prosecutor objects to the
downward departure, the sentencing court will be less likely to grant the downward departure. If
nothing else, the prosecutors objection is a signal that the Government may appeal and the appellate
court may see the equities of departure different than the sentencing court. If, however, the
prosecutor signals the sentencing court that the Government will not object to a downward
departure, the court will have much more latitude for a downward departure because, with that
signal, the court knows that the Government will not appeal a downward departure. Even better,
would be a Government signal to the court (preferably in writing, if possible) that the Government
affirmatively agrees that a downward departure is appropriate. In that case, the sentencing court will
feel even better about a downward departure because the protagonist agrees it is appropriate and
there will be no appellate review.
What happens if the sentencing court denies a downward departure? The taxpayer can
appeal, provided he has not waived the right to appeal in the plea agreement. I cover appeals below.
(3)
Legislative Restriction.
Concerned that courts were too liberal in their application of the departures, Congress has
recently (Spring 2003) tightened the reins on the judiciary. The tightening was by amendment to
the so-called Amber Alert Act.818 The key revisions are:
De novo review of departure determinations, although Booker does now require that
the review be based on abuse of discretion rather than de novo.
Directing the Commission to revise the Guidelines to further constrict downward

departures.
816
See 5H1.1 and 5K2.13.

See United States v. Cooper, 394 F.3d 172 (2d Cir. 2005) (see both majority and
dissenting opinions discussing cases).
818
This act is called the Prosecutorial Remedies and Other Tools to end the Exploitation
of Children Today Act of 2003 (often acronymed to the PROTECT Act), Pub. L. No. 108-21, 117
Stat. 650, 670 (2003).
817
- 363 -
Directing the Commission to report to Congress all downward departures and the
judges granting them.
For 5K departures (substantial assistance departures), prosecutors must give and the
court must make specific findings about the cooperation. Some defense counsel
worried that this will lead to reversals on appeal and raised the specter of less
cooperation as a result of this increasing possibility. However, if the downward
departure is at the request of the prosecutor, then there will be no appeal. Statistics
indicate that 79% of the downward departures are at the request of the prosecutor
(note that in tax cases this is only about 60%). Hence, it seems to me that the
legislation will not pose a significant problem or change in practice for 5K
departures.
It is unclear what effect of this legislative restriction post-Booker, other than requiring the
sentencing judge to pay attention if he desires the departures to be significant in sentencing to
enhance support that might other exist for a Booker variance.
e.
Non-Guideline / Booker Variances for Cooperation.
Even where the Government does not move for a cooperation departure, a defendant who
in fact cooperates should consider requesting a variance under the general 3553(a) standards that
Booker blessed.819
f.
Rule 35 Departures.
FRCrP Rule 35(b) permits a court to reduce the sentence for substantial assistance upon the
Governments motion. If the motion is filed within one year of the sentence date, the sentencing
court has the same leeway it would have had under the Guidelines. If the motion is filed beyond that
one year period, reduction is permitted only if (i) it is based on information not known to the
defendant before the end of the one year period; (ii) if known earlier, the information did not become
useful to the Government until after the end of the one-year period; or (iii) the defendant could not
have anticipated the usefulness of the information until after the one-year period and the information
was then promptly provided to the Government.
819
See United States v. Fernandez, 443 F.3d 19, 33-34 (2d Cir. 2006). See also I. India
Geronimo, Reasonably Predictable: The Reluctance to Embrace Judicial Discretion for Substantial
Assistance Departures, 33 Fordham Urb. L.J. 1321 (2006); and Mark P. Rankin and Rachel R. May,
Substantial Assistance -- The Key to Freedom: Representing a Cooperating Defendant in Federal
Court, 31 Champion 12, 14 (2007).
- 364 -
g.
Proportionality Among Crimes - Departure by Grouping

Down.
The issue arises from the fact that a particular criminal scheme may involve violations of
several types of crimes that have different guidelines that apply to them. We saw how grouping can
benefit the defendant by preventing enhancements based on conviction on more than one count.
However, consider criminal acts that are two or more disparate crimes having radically different
punishments. Lets assume a situation where a defendant undertook a fairly simple scheme to
defraud by use of the wires (wire fraud), but also then moved the money around in a way that
violated the money laundering statutes. The penalties for wire fraud are substantially less than the
penalties for money laundering. If the criminal acts are closely related (as they are in this simple
example), one can argue that they should be grouped. But do you group them under the fraud
guidelines or under the money laundering guidelines and where does departure fit into this scheme?
The issue is important in this example because the money laundering ranges are generally much
higher than the ranges for fraud. As noted above, the grouping rules require that the sentence be
based upon the highest sentencing range if they are grouped and, if not grouped, are still based upon
the highest sentencing range with an enhancement based upon the nongrouped counts of conviction.
The Guidelines do not provide for using the lower sentencing range rather than the highest
sentencing range. But perhaps that can be achieved by departure.820
16.
The One Book Rule and Ex Post Facto Issues.

a.
Pre-Booker.
Prior to Booker, the courts applies the Guidelines version applicable on the date of
sentencing unless to do so would result in a harsher sentence than under the Guidelines on the date
of the offense, thus implicating the Constitutions guarantee of no ex post facto laws.821 And, the
applicable Guidelines are applied in their entirety -- the taxpayer cannot pick and choose favorable
components of different guidelines.822
The one book rule operates easily and comfortably where the offense occurs or offenses
occur under one Guideline which, in its entirety, produces a more lenient sentence, and sentencing
occurs at a time when the then current Guideline which, in its entirety, produces a harsher sentence.
Because of ex post facto concerns, the earlier Guideline applies. But what happens where the
offenses of conviction span a period covered by both more lenient versions of the Guidelines and
harsher versions of the Guidelines? The Guidelines provide that the most recent Guideline applies
820
United States v. Smith, 186 F.3d 290 (3rd Cir. 1999) (reversing the district courts
use of the more stringent money laundering provisions required by the normal grouping rules); see
also United States v. Dadi, 235 F.3d 945 (5th Cir. 2000), sustaining application of the more stringent
rules against a Smith-type argument.
821
1B1.11.
822
1B1.11(b)(2).
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to sentencing for both counts.823 Does this avoid an ex post facto problem? The Sentencing
Commission thinks it does.824 The Courts are not so certain.825
Care should be taken to identify the date of each offense for purposes of determining the one
book rule. In many tax cases, this is evident. For example, the crimes of evasion or tax perjury is
usually the date that the return is filed. However, a subsequent event can trigger a later date for
determining the applicable book. For example, if the taxpayer files commits evasion of assessment
by filing a fraudulent return on the normal due date (say 4/15/02 for a year 01 return) but then in a
later year (say 04) makes false statements in furtherance of the evasion, the false statements will be
a new act of evasion that will cause the statute of limitations on the original evasive act (filing the
return) to be refreshed under the continuing offense doctrine.826
Finally, a later book or version of the guidelines can provide guidance as to the application
of the earlier book if the changes made in the later book are procedural or clarifying in nature.827
b.
Post-Booker Ex Post Facto Irrelevant?
There is currently a split in the circuits as to whether Booker and its progeny which interpret
the Guidelines regime as advisory only eliminate the ex post facto concerns and thus require that the
current version of the Guidelines be used for sentencing.828 I defer further development of the
dispute because there will likely be more definitive developments as the Circuits address the issue
and move into agreement or, alternatively, the Supreme Court takes the issues and resolves it.
17.
The Presentence Investigation Report (PSR).
After conviction or entry of a guilty plea, the Probation Office will conduct an investigation
into the defendants background and other information relevant for sentencing.829 The investigation
will include one or more interviews with the defendant and with other persons as the Probation
Officer deems relevant. If, in the case of a plea bargain resulting in a guilty plea, the defendant
wants to qualify for the acceptance of responsibility reduction, the defendant must make statements
823
1B1.11(b)(3).
1B1.11, Background.
825
United States v. Sullivan, 255 F.3d 1256, 1259-1263 (10th Cir. 2001) (discussing the
split among the circuits and rejecting the application of the one-book rule in this type of case).
826
United States v. Barker, 556 F.3d 682 (8th Cir. 2009) in which there was such a later
evasive act that subjected the defendant to a harsher regime under a later book.
827
E.g., United States v. Patti, 337 F.3d 1317, 1324 (11th Cir. 2003).
828
Compare United States v. Demaree, 459 F.3d 791 (7th Cir.) (Posner, J.), cert. denied,
551 U.S. 1167 (2007) (holding ex post facto irrelevant and applying current Guidelines) with United
States v. Turner, 548 F.3d 1094, 1098-1100 (D.C. Cir. 2008) (carrying forward prior analysis, thus
not permitting current Guidelines) and United States v. Wetherald, 630 F.3d 1315 (11th Cir. 2011)
(same).
829
FRCrP Rule 32(c)(1).
824
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to the Probation Officer that will permit the Probation Officer to make its own determinations and
recommendations to the Court as to acceptance of responsibility. The defendant may assert a Fifth
Amendment right not to provide information to the probation officer regarding factors such as
offense conduct, relevant conduct and criminal history that could result in punishment beyond that
authorized by the stipulated facts supporting a guilty plea;830 but, by doing so, the defendant may
suffer loss of the downward reduction for acceptance of responsibility.831 The Probation Officer will
then produce a Presentence Investigation Report (commonly referred to acronymically as a PSR
and sometimes as PSI) going over all the relevant sentencing factors. The defendants counsel
will usually be provided a draft that can then be changed for errors that the Probation Officer agrees
to. As to other more substantive errors that the Probation Office will not agree are errors, the
defendants counsel may then make formal objections in a written pleading to the Court.
A district court may waive the PSR if it finds that there is sufficient information in the record
to sentence.832
18.
Sentencing Hearing.
At the sentencing, the Court will resolve all factual disputes as to the matters relevant to
sentencing. As stated in the prior materials, the Court decides the factual disputes on a
preponderance of the evidence standard. The Federal Rules of Evidence do not apply at the
hearing.833 And the Court may consider information without regard to its admissibility at trial.834
Further, No limitation shall be placed on the information concerning the background, character, and
conduct of a person convicted of an offense which a court of the United States may receive and
consider for the purpose of imposing an appropriate sentence.835
The court resolves factual disputes by a preponderance of the evidence standard.836 Some
courts have held, however, that, where a sentencing enhancement (such as a prior criminal history)
has a severe effect on the sentence relative to the crime of conviction, the Government must prove
the factual predicate for such enhancement by a clear and convincing standard rather than a mere
830
Jennifer Niles Coffin, Tap Dancing Through the Minefield: Navigating the
Presentence Process, 31 Champion 10, 11 (2007), citing Mitchell v. United States, 526 U.S. 314,
316-17 (1999) which held that a guilty plea does not waive the Fifth Amendment so as to permit the
sentencing court to draw an adverse inference from the defendants silence at sentencing.
831
United States v. Henderson, 83 Fed. Appx. 677, 678 (5th Cir. 2003), cert. denied 541
U.S. 1031 (2005).] ([T]he refusal to debrief a probation officer [is] a factor in deciding whether to
apply the adjustment for acceptance of responsibility.); and United States v. Solis, 299 F.3d 420,
458 (5th Cir. 2002).
832
FRCrP Rule 32(c)(1)(A)(ii).
833
FRE Rule 1101(d)(3).
834
S.G. 6A1.3(a).
835
18 U.S.C. 3661.
836
U.S.S.G. 6A1.3, Commentary.
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preponderance of the evidence.837 Notwithstanding, the trend seems to be that post-Booker, where
the Guidelines are merely advisory to the Judges 3553(a) sentencing discretion, the
preponderance of the evidence standard applies so long as the Guideline factors do not increase the
statutory maximum to which the defendant is exposed.838
As noted, the kind and quality of the evidence a sentencing court may consider in making
the predicate factual findings (under either the preponderance or the clear and convincing standards)
is extremely relaxed. The PSR which consists of hearsay and summaries of other documents that
are not necessarily before the Court may, if not contested by the defendant, alone satisfy the burden
of proof under either standard.839 However, as to the critical tax loss number that usually is the
principal factor in setting the sentencing range, the courts generally hold that the preponderance of
the evidence standard applies, but some courts hold that the Government must affirmatively prove
the tax loss number and may not just rely on the PSR even if uncontested.840
The defendant may assert the Fifth Amendment privilege at the sentencing hearing. The
sentencing judge should not draw an adverse inference from the defendants silence.841
Prior to actually imposing sentence, the court will also address the defendant personally and
give the defendant and his attorney the opportunity to make any statement or make a presentation
to mitigate the sentence.842 This process is called allocution.843 The prosecutor may also speak.844
The court must also advise defendant of his right to appeal.845 Note however, as discussed
elsewhere, the defendant may have limited or even practically eliminated his or her right to appeal
in the plea agreement.
837
See e.g., United States v. Hopper, 177 F.3d 824 (9th Cir. 1999).
United States v. Vallareal-Amarillas, 562 F.3d 892 (8th Cir. 2009)
839
See United States v. Romero-Rendon, 220 F.3d 1159 (9th Cir. 2000). For a specific,
and I think potentially troubling instance of the use of such hearsay in the PSR, see United States
v. O'Doherty, 643 F.3d 209 (7th Cir. 2011) where the PSR determined a tax loss based upon the
probation officers telephone conversation with the internal revenue agent who advised of the tax
loss the Government claimed and further asserted that the claimed tax loss was based on Forms
1099. The Court of Appeals held that that telephone conversation was sufficiently reliable hearsay
to support the sentencing courts reliance on the PSR for the tax loss determination. See my blog
Relaxed Evidentiary Requirements for Preponderance of Evidence at Sentencing (6/22/11).
840
See United States v. Tucker, 217 F.3d 960 (8th Cir. 2000) (holding that the PSR is
not evidence, thus in the Eigth Circuit casting doubt upon the analysis in United States v.
Romero-Rendon).
841
Mitchell v. United States, 526 U.S. 314 (1999).
842
843
For a sentencing judges view of the importance of the criminal defendants right of
allocution, see Mark W. Bennett, Heartstrings or Heartburn: A Federal Judge's Musings on
Defendants' Right and Rite of Allocution, 35 Champion 26 (2011).
844
FRCrP Rule 32(c)(i)(4)(A)(iii).
845
FRCrP Rule 32(j)(1).
838
- 368 -
19.
Sentencing -- The Rubber Hits the Road.

a.
The Booker Variance Process.
I have spent considerable time discussing the Sentencing Guidelines which, to repeat yet
again, are no longer mandatory post-Booker. I cannot stress too strongly, however, the importance
of the attorneys both prosecution and defense mastering these Guidelines. Certainly, in
negotiating a plea which is how most federal criminal cases are resolved plea agreements must
be crafted to present the best Guidelines calculations possible. But then, after the Guidelines
calculations (including departures) have been mined to their maximum extent, the attorneys must
be prepared to address the general 3553(a) factors that bear on the sentencing judges exercise of
discretion.
Essentially, the drill after the Guidelines calculations is to identify factors preferably those
enumerated in 18 U.S.C. 3553(a) (keeping in mind that some are pretty broad factors that may
move the sentencing judge to make discretionary sentencing calls to vary from the Guidelines
calculations (including any departures under the Guidelines). The prosecutor and defense counsel
must do this. Usually, in tax cases, the prosecutor will be content with sentencing within the
Guidelines ranges, and indeed will usually be prohibited from agreeing to a downward variance (i.e.,
a downward adjustment below the Guidelines range based on nonGuidelines factors). What special
circumstances exist? I discussed above the Tomko case which is perhaps the quintessential example
of the art of advocacy for presenting persuasively such special factors.846
The Supreme Court recently held, for example, that
When a defendant's sentence has been set aside on appeal, a district court at
resentencing may consider evidence of the defendant's post-sentencing rehabilitation,
and such evidence may, in appropriate cases, support a downward variance from the
now-advisory Guidelines range. a defendants post-sentencing rehabilitation efforts
846
I do note one such special factor that courts of appeals think less of than some
sentencing judges. That is that the defendant is entitled to some sentence mitigation because of the
great costs incurred in defending the criminal case, that can have a severe economic impact on the
defendant and his family. Courts of appeals hold that that is not a proper mitigating factor. See
United States v. Engle, 592 F.3d 495, 504 - 505 (4th Cir. 2010). Lawyers, of course, like to help
clients, particularly when it is in the lawyers economic interest to do so. Had high attorneys fees
been a permitted factor for sentencing mitigation, just imagine how fee agreements would be written
there would be the usual success bonus if the defendant is acquitted, but then there would be a
failure bonus is the defendant is convicted. For the lawyer, it would be win-win regardless, and so
too for the client (win by acquittal or win by mitigated sentence), and the lawyer will have earned
the extra bonus in any event. But, alas, the courts have not bestowed this opportunity upon the
lawyers.
- 369 -
while his original sentencing was being considered in multiple appeals could be
considered on re-sentencing.847
The Court reasoned that the broad commands of 18 U.S.C. 3661 and 3553(a) that no limits could
be placed on the information concerning the particular defendants life and characteristics and
certainly post-rehabilitation efforts are relevant to the defendant before the court on re-sentencing.
The Court nicely summarized its vantage point as follows:
It has been uniform and constant in the federal judicial tradition for the
sentencing judge to consider every convicted person as an individual and every case
as a unique study in the human failings that sometimes mitigate, sometimes magnify,
the crime and the punishment to ensue. Underlying this tradition is the principle
that "the punishment should fit the offender and not merely the crime."
In so holding, the Court even struck down 18 U.S.C. 3742(g)(2) which facially prohibits a
sentencing court on re-sentencing from considering to consider only grounds for relief originally
considered at the first sentencing. Essentially, the Court said that this statute made the Guidelines
more mandatory than Booker contemplated because it takes away from the Judges broad Booker
discretion. And, consistently, the Court rejected any persuasive effect for the policy statement for
departures (although this was not technically a departure case) that read: [p]ost-sentencing
rehabilitative efforts, even if exceptional, undertaken by a defendant after imposition of a term of
imprisonment for the instant offense[,] are not an appropriate basis for a downward departure when
resentencing the defendant for that offense.848
Of course, all practitioners know that this concept can also be applied at the original
sentencing. Defense counsel should press for any advantage rehabilitation efforts after the actual
crime(s) of conviction and even after conviction while awaiting sentencing. If the judge is
convinced that the defendant has put himself or herself on the right track, the judge may be moved
to make a material variance.
There are two lessons for rehabilitation: (1) the defendant should rehabilitate himself or
herself as early as possible, for several reasons including its potential effect on sentencing and (2)
in appropriate cases, defense counsel must consider that efforts at rehabilitation that can move a
court may take more time and thus may need to slow down the process before a final sentencing
(i.e., perhaps not move to a plea so quickly and all those other normal delays that will buy time
without prejudicing the defendant in other ways) and that might even require taking an appeal from
the first sentence so long as it is not foreclosed by any plea agreement and results in a resentencing.
But beyond the specific context of rehabilitation, there is a larger lesson in this case.
Creative thinking about the potential scope of Booker is required. I suspect that most practitioners
847
848
Pepper v. United States, ___ U.S. ___, 131 S.Ct. 1229 (2011) (from the Syllabus).
S.G. 5K2.19.
- 370 -
would not have given the argument too much chance of succeeding, and it did not succeed in the
Eighth Circuit. But, it did in the Supreme Court.
b.
The Sentencing Process.
Lets look at some statistics resulting from Booker. In the 2009 fiscal year,849 37.7 % of tax
offenders were sentenced in the Guidelines range, about 5% were sentenced above the range and the
balance were given departures or Booker variances for a sentence below the Guidelines range. For
tax cases, the mean months sentenced is 15.7 and the median months sentenced is 12.00 months.850
In contrast, for economic crimes generally (of which tax is a subset), the average length of the
sentence was 28.3 months.851 So, one might reasonably infer that tax crimes are treated as less
severe than economic crimes generally (although one would have to compare the amounts involved,
which are the primary determinants of Guidelines ranges between the larger economic crimes unit
and the subset tax unit).
20.
Incarceration or Bail Pending Sentencing or Appeal.
18 U.S.C. 3143 provides a general rule that requires immediate incarceration upon a verdict
of guilty or, if later, after sentencing even if an appeal is taken. The exceptions are generally
applicable in a tax case, at least after the verdict and before sentencing where the court can release
pending sentencing upon a finding by clear and convincing evidence that the defendant is not likely
to flee or pose a danger to another person or the community.852 After sentencing during the appeals
process, it is a bit dicier. In order to avoid detention after sentencing pending the appeal, the court
must find by clear and convincing evidence that the defendant is not likely to flee or pose a danger
to another person or the community and that the appeal is both not for purposes of delay and does
raise a substantial question of law or fact that might result in reversal (either outright or for new
trial), a sentence with no imprisonment or a reduced sentence that exceeds the time already served
and to be served during the appeals process.853
21.
Appeal.
Booker now mandates that sentencing decisions are subject to appeal on an abuse of
discretion standard. Since sentencing within the now advisory Guidelines ranges will likely be
considered reasonable, most of the appellate consideration will likely revolve around departures.
849
U.S. Sentencing Commission, Sourcebook of Federal Criminal Statistics (2009),

Table 27, Sentences Relative to the Guideline Range by Each Primary Offense Category.
850
Id., Table 13, Average Sentence Length in Each Primary Offense Category.
851
Id., Figure E, Average Length of Imprisonment in Each General Crime Category.
852
3143(a)(1).
853
3143(b). See e.g., United States v. Simon, 2011 U.S. Dist. LEXIS 37001 (N.D. IN
2011) (where the court noted family reasons for releasing the defendant pending appeal but was
constrained by the requirement that it could find that the defendant raised a substantial question of
law or fact).
- 371 -
There is some history regarding the appellate review standard for departures that the practitioner
should know and thus I summarize it.
In Koon v. United States,854 the Court held in a non-tax case that judges have considerable
discretion to depart and that the exercise of that discretion is subject to review on an abuse of
discretion standard. Koon established the following: (1) factors developed at the trial level may be
considered for such downward departures (as well as upward departures) unless they are specifically
prohibited by the guidelines (examples of prohibitions are race, sex, etc.); (2) if the factors are not
expressly prohibited, the court must consider in the context of the facts before it whether the factors
are encouraged or discouraged by the Guidelines; (3) such identified factors may be considered if
present to an exceptional degree; (4) the court will have considerable discretion in considering these
factors that it identifies, including factors not identified in the Guidelines; and (5) the standard for
review of the district judges downward departure is abuse of discretion rather than de novo review.
It is generally felt that the combination of these factors gives a trial court much more discretion than
had previously been thought. Here, the unique facts of a particular case and the advocates skill are
principal influences in getting a trial court interested in making a departure.
In 2003, Congress enacted a de novo review for departures legislatively reversed Koons
standard for review on appeal; now the review is de novo rather than abuse of discretion.855
Booker, of course, now imposes an abuse of discretion review standard.
Of course, even pre-Booker, a defendant or the Government could appeal and obtain relief
if the sentence violated the law (e.g., is above or below any statutory maximum or statutory
minimum for the count(s) of conviction)856 or the judge incorrectly applied the now-advisory
Guidelines. For purposes of the second basis for appeal (incorrect application of the guidelines),
a court of appeals will remand if it finds error, unless it determines based on the whole record that
the error was harmless.857
Findings of fact in the application of the guidelines or departures are reviewed on a clearly
erroneous standard, which is the standard of review generally for findings of fact made by a judge
(as opposed to findings made by a jury).858
854
18 U.S. 81 (1996).
The Prosecutorial Remedies and Other Tools to end the Exploitation of Children
Today Act of 2003 (often acronymed to the PROTECT Act), Pub. L. No. 108-21, 117 Stat. 650,
670 (2003).
856
An error in the application of the policy statement as opposed to a guideline is
reviewable as an incorrect application of the guidelines. Williams v. United States, 503 U.S. 193,
200-201 (1992). Similarly, an error in the application of the commentary to the guidelines is
reviewable unless inconsistent with the Constitution, laws or a guideline. Stinson v. United States,
508 U.S. 36 (1993).
857
Williams v. United States, 503 U.S. 193, 202 (1992).
858
FRCrP Rule 52(a).
855
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The parties may waive their right to appeal by contract in the plea agreement. Often the plea
agreement will state that, so long as the sentence does not exceed that allowed by a certain computed
sentencing level, the defendant will not appeal. Correspondingly, the plea agreement may say that,
so long as the sentence is not less than a certain minimum, the Government will not appeal. There
are many variations in between. For example, the Government might not specifically waive its right
to appeal a downward departure, but use language in the plea agreement or at the plea or sentencing
hearing that will signal to the judge that the Government will not appeal a departure. So long as the
judge sentences within the range the parties agreed upon, neither party may appeal.859
Sentencing errors must generally be asserted on direct appeal from the sentencing.860
However, a subsequent challenge may be made under 18 U.S.C. 2255 if the alleged error relates
to a claim of inadequate assistance of counsel.861
22.
Good Time Credits.
18 U.S.C. 3624(b) provides that a federal prisoner serving a term of imprisonment of more
than one year may receive up to 54 days at the end of each year of the prisoners term of
imprisonment, beginning at the end of the first year of the term. As interpreted, a prisoner will get
about 12.88% per year for good time credit, meaning that allowable number of days credit per year
is 47.862 Note that this credit applies only for a sentence for more than one year. Thus a sentence
of one year requires time served of 365 days. A sentence of one year and one day requires time
served of 319 days. What a difference a day makes!
III.
Pleas and Plea Negotiations.

A.
The Plea Agreement.

1.
Importance of Plea Agreements.
Defendants in criminal tax cases (and in federal criminal cases generally) usually plead guilty
pursuant to a plea agreement where, in return for the plea, the Government gives the defendant some
quid pro quo. In the federal criminal system, the Supreme Court recently indicated that 97% of
859
18 U.S.C. 3742(c).
See United States v. Schlesinger, 49 F.3d 483, 485 (9th Cir. 1994).
861
See Weinberger v. United States, 268 F.3d 346 (6th Cir. 2001) (citing authority); and
United States v. Barnes, 324 F.3d 135 (3d Cir. 2003). 2255 is the statutory descendant of the
common law writ of habeas corpus. For a good summary, see Allan Ellis and James H. Feldman,
Jr., A 2255 and 2241 Primer, 26 Champion 26 (2002).
862
See Pacheco-Camancho v. Hood, 272 F.3d 1266, 1271-72 (9th Cir. 2001) (the leading
opinion, authored by Judge Kozinski, sustaining the Bureau of Prisons interpretation of the statute).
The battle ground is that the legislative history seems to suggest that good time credits would be 15
percent each year so that the prisoner would serve only 85% of the year. But, that is not what the
statute says.
860
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cases are resolved by plea.863 In criminal tax cases more than 90% of all tax indictments result in
a guilty plea.864 In short, as the Supreme Court recently noted pungently, criminal justice today is
for the most part a system of pleas, not a system of trials.865 And, albeit redundantly, plea
bargaining, is not some adjunct to the criminal justice system it is the criminal justice system.866
Because of the central role of plea agreements in the criminal system, the Supreme Court has
recently held that defendants are entitled to the effective assistance of counsel during the plea
negotiation process.867 This means that, if defense counsel does not advise the defendant of at least
formal plea offers, the defendant may have a 2255 remedy (federal habeas corpus type remedy)
and, probably, a malpractice suit as well.
The plea agreement is negotiated between the Government and the defendant (with a
represented defendant participating through his counsel). Those negotiations do not include the trial
judge.868 The procedural rules for plea agreements are in FRCrP 11 which is discussed below.
2.
Nature of Plea Agreements.

a.
The Contract.
A plea agreement looks and feels like a contract between the defendant and the prosecutor.
Courts view plea agreements as contracts or sufficiently contract-like that they may be judicially
interpreted and enforced like contracts.869 The parties negotiate over the terms of the plea
agreement, which means that each side gives up some rights and opportunities by virtue of the plea
863
Missouri v. Frye, ___ U.S. ___, 2012 U.S. LEXIS 2321 (2012).
I am not aware of good statistics on pleas in federal criminal tax cases. There are
some out there, but there is some inconsistency. I discuss my perceptions of fuzziness in the plea
statistics at p. 478
865
Lafler v. Cooper, ___ U.S. ___, ___, 132 S. Ct. 1376, 1388 (U.S. 2012).
866
Missouri v. Frye, ___ U.S. ___, ___, 132 LEXIS 2321 (2012) (quoting Scott &
Stuntz, Plea Bargaining as Contract, 101 Yale L. J. 1909, 1912 (1992)).
867
Missouri v. Frye, ___ U.S. ___, 2012 U.S. LEXIS 2321 (2012) (failure to advise the
defendant of a time-limited plea offer by the prosecutor); and Lafler v. Cooper, ___ U.S. ___, 2012
U.S. LEXIS 2322 (2012) (providing the defendant highly questionable advice to reject a proffered
plea and go to trial instead). In an earlier case, the Court had anticipated this broader holding the
context of a plea agreement where the attorney failed to advise the defendant of the collateral
immigration consequences of the plea. Padilla v. Kentucky, 559 U. S. ___, ___ (2010).
868
FRCrP Rule 11(c)(1).
869
United States v. Cantu, 185 F.3d 298, 304 (5th Cir. 1999) ([W]e apply general
principles of contract law in order to interpret the terms of the plea agreement.). For good
discussions of this concept in the context of appeals waivers entered before Booker in which case
the defendants may have waived rights they did not know they had, see United States v. Bownes,
405 F.3d 634 (7th Cir. 2005), cert. denied 126 S.Ct. 320 (2005) (Judge Posner) and United States v.
Morgan, 406 F.3d 135 (2d Cir. 2005).
864
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agreement and each side benefits from rights and opportunities foregone by the other side. Still, as
Judge Posner has noted,
A plea agreement is a type of contract, and the principles of contract law are highly
developed, though * * * * their application to plea agreements must be tempered by
recognition of limits that the Constitution places on the criminal process, limits that have no
direct counterparts in the sphere of private contracting.870
b.
The Market Analogy.
Perhaps consistent with the contract analysis, Judge Easterbrook, also of the Seventh Circuit,
and others have championed a market analogy to the dynamics of plea negotiations.871 The analogy
has been described as follows:
[P]lea bargaining, together with other accouterments of criminal procedure, [can] be
understood as elements of a well-functioning market system that set the price of
crime and thereby tend to get the maximum deterrent punch out of whatever
resources are committed to crime control. Describing plea negotiations, Easterbrook
asserted that a prosecutor will have a minimum settlement demand determined by the
penalty the prosecutor thinks he may obtain after trial and the cost of holding the trial
(less the cost of settling). As the sentence on conviction and the probability of
conviction rise, so does the prosecutor's minimum demand. A defendant, meanwhile,
comes to plea negotiations with her own settlement offer, dictated by the sentence
she expects to receive if convicted, adjusted for the likelihood of conviction, together
with the cost savings associated with settlement (as opposed to taking the case to
trial). These offers, both framed with likely trial outcomes in mind, will yield a deal
if the defendant's maximum offer equals or exceeds the prosecutor's minimum
demand. To Easterbrook, these interactions, repeated across cases, fulfill a
price-establishing function at low cost, and are therefore desirable, not just
defensible, if the system attempts to maximize deterrence from a given commitment
of resources.872
c.
Some Applications.
One of the most common areas where a party seeks to avoid a term of the plea agreement is
in the context of the appeals waiver. The CTM notes that A plea agreement generally should
contain language waiving the defendants appeal rights, particularly the right to appeal the sentence
870
United States v. Bownes, 405 F.3d 634 (7th Cir. 2005), cert. denied 126 S.Ct. 320
(2005); see also United States v. Barnett, 415 F.3d 690, 692 (7th Cir. 2005) (Posner, J.) (Plea
bargains are a form of contract [citations omitted], and like other contracts are presumed to make
both parties better off and do no harm to third parties, and so they are enforceable and enforced.).
871
See Kyle Graham, Crimes, Widgets, and Plea Bargaining: An Analysis of Charge
Content, Pleas and Trials, 100 Calif. L. Rev. 1572, 1579-1580 (2012).
872
Id., footnotes and quotations omitted.
- 375 -
and that In tax cases, prosecutors should draft waivers of appeal to be specific, unambiguous, and
as broad as possible.873 Notwithstanding that, the waiver of the right to appeal is a significant
waiver for the defendant surrendering rights that could be valuable. Accordingly, the defendant will
agree to that constriction on his rights only where the Government offers plea benefits worth the
waiver. In short, systemically, I suspect that the Government leaves something on the table for the
waiver in order to get it, so that the system is not further burdened by the matters at hand. That is,
of course, true of plea bargains in general because, without them, the system would fail.
The cases hold that the defendant may waive the right to appeal. Indeed, the cases following
Booker establish that a broadly worded appeal waiver will preclude the defendant from appealing
rights that he did not know he had. You will recall that Booker found the mandatory feature of the
Sentencing Guidelines unconstitutional and signaled the possibility that a sentencing judge could
give sentences different than would have otherwise been required or constrained by the Guidelines.
Naturally, many defendants who pled before Booker and were sentenced pre-Booker but whose
direct appeal was heard after Booker saw the possibility of sentencing relief if they could avoid their
appeal waiver. The Courts hold those defendants to the burdens of their bargain (to use contractual
jargon). Judge Posners analysis is instructive (excluding most case citations for readability):
Bownes argues that Booker is special because it brought about a sea change
in the law. The identical argument was rejected, rightly in our view, in the Bradley
and Killgo cases that we cited in the preceding paragraph. It is true that Booker has
had a tremendous impact because it has affected many thousands of sentences, but
it is no more, and indeed less, of a sea change than numerous other legal
innovations scattered across the volumes of the United States Reports and the
Federal Reporter. And anyway a sea change exception to the rule that an
unqualified appeal waiver is to be enforced as written would be hopelessly vague.
It is also unnecessary given the limitations on waiver of the right of appeal
in a criminal case that are imposed by judicial interpretations of the due process
clause. As we noted in United States v. Josefik, 753 F.2d 585, 588 (7th Cir. 1985),
there are limits to waiver; if the parties stipulated to trial by 12 orangutans the
defendants conviction would be invalid notwithstanding his consent, because some
minimum of civilized procedure is required by community feeling regardless of what
the defendant wants or is willing to accept. Thus a sentence based on
constitutionally impermissible criteria, such as race, or a sentence in excess of the
statutory maximum sentence for the defendants crime, can be challenged on appeal
even if the defendant executed a blanket waiver of his appeal rights. A particularly
striking example of the divergence between the legal principles that govern plea
agreements and those that govern ordinary contracts is that while a contracting party
is bound by the mistakes of his lawyer, however egregious (his only remedy being
a suit for malpractice), the Constitution entitles defendants entering plea agreements
to effective assistance of counsel.
873
DOJ CTM 5.01[3] (2008 ed.).
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We need not decide precisely how deep an inroad the cases elucidating such
differences make into the contractual model of plea bargaining. None of them bears
on the present case. Indeed, it is not even clear that defendants as a whole would
benefit from a right to rescind a plea agreement on the basis of a sea change in law.
Apart from the fact that the government would insist on a compensating concession,
and apart from the further fact that rescission would relieve the government from
whatever concessions it had made to obtain the agreement, the government would
be able to rescind a plea agreement favorable to the defendant if an intervening
decision had brought about a sea change in favor of the government; what is sauce
for the goose is sauce for the gander.874
Finally, the appeal waiver in most federal plea agreements will cover not only direct appeals
but any other form or appeal or collateral attack under 2255 or 2241. One court has recently
noted:
In the context of a waiver of collateral attack, all circuits to have addressed
the issue agree that a valid sentence-appeal waiver, entered into voluntarily and
knowingly, pursuant to a plea agreement, precludes the defendant from attempting
to attack, in a collateral proceeding, the sentence through a claim of ineffective
assistance of counsel during sentencing. This outcome is compelled because a
contrary result would allow a defendant to avoid the contractually agreed upon
obligation simply by recasting a challenge to his sentence as a claim of ineffective
assistance, thus rendering the waiver meaningless.875
A defendant may also want to apply contract principles to enforce implicit obligations of
good faith. This issue is presented in the context of a 5K1 motion for downward departure based
on substantial assistance. In the absence of a plea agreement, of course, the Governments decision
as to whether to file a 5K1 motion is pretty much unreviewable, absent some unconstitutional
factor.876 But, the parties should consider and specifically address the issue in the plea agreement.
Depending upon the parties bargaining positions, the plea agreement may (i) unconditionally
commit the prosecutor to make the motion which is often not available because, at the point of the
plea agreement, the defendant will not have given the level of cooperation to justify the motion, (ii)
commit the prosecutor to make the motion based on some objectively determined condition in which
case the only question is whether the objectively determined criteria have been me, (iii) grant the
prosecutor sole and unreviewable discretion (or some similar formulation) as to whether to file the
motion based on the prosecutors perception of the level and/or value of the defendants cooperation,
or (iv) provide that the prosecutor will not file the motion.
For purposes of addressing the good faith obligation, lets focus upon category (iii) an
agreement that states that the prosecutor has sole and unreviewable discretion as to whether to make
874
United States v. Bowne, 405 F.3d 634 (7th Cir. 2005).

United States v. Murray, 2011 U.S. Dist. LEXIS 138976 (ED CA 2011) (case
citations and quotations omitted).
876
Wade v. United States, 504 U.S. 181 (1992).
875
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the motion based on the prosecutors assessment of the level and/or value of the defendants
cooperation. In this context the defendant will argue that, since contracts require that each party is
obligated to implement the contract in good faith, 877 and since plea agreements are contracts or
contract-like, the Government has a good faith obligation with respect to the 5K1 Motion and that
the Government breached the obligation.
There is no question that, in exercising its discretion, the prosecutor may not use a
constitutionally prohibited factor (such as race or sex).878 Setting aside constitutionally
impermissible factors, the courts of appeals appear split as to whether the prosecutor has a duty of
good faith in exercising the discretion allowed by the plea agreement. Courts viewing the plea
agreement as contract or contract-like may apply the contract law principle of good faith, thus
permitting judicial review if the defendant can establish the prosecutors bad faith in exercising
discretion not to file a 5K1 motion;879 other courts, including the Fifth Circuit, hold that courts will
not review the prosecutors exercise of its discretion.880 Is this split real? (Split is litigator-speak
to indicate that the courts of appeals differ in some respect, the question here is whether the
difference is a real one.)
A defendant may argue that the Government simply breached the requirements of the
contract. This may be a variation of the good faith theme, but may be more straight-forward benefit
of the bargain analysis. I illustrate this with a recent Fifth Circuit case which did not involve tax but
illustrates the point. In United States v. Munoz, 408 F.3d 222 (5th Cir. 2005), the defendant and the
Government entered an extensive plea agreement addressing inter alia the sentencing factors,
deriving an agreed bottom-line offense number to which the sentencing table would apply.
Although, as noted above, the parties cannot bind either the Probation Office or the sentencing court
as to the sentencing factors, the Governments commitment to recommend that sentencing factors
is a significant inducement to defendants because the Probation Office and the courts rarely depart
from the parties agreements. Nevertheless, in this case, the Probation Office performed the
calculations differently and its PSR recommended a significantly higher offense level and heartland
sentencing range. A significant factor in the Probation Offices calculation was an abuse-of-trust
enhancement.881 The plea agreement was silent on that enhancement. At sentencing, of course, the
877
E.g. Restatement (Second) of Contracts 205.

S.G. 5H1.10.
879
United States v. Isaac, 141 F.3d 477, 482-84 (3d Cir. 1998) (majority and dissenting
opinions have good discussions of issues and cases); and United States v. Alegria, 192 F.3d 179, 187
(1st Cir. 1999).
880
The Fifth Circuit case is United States v. Aderholt, 87 F.3d 740, 742-43 (5th Cir.
1996). Other cases are discussed in the majority and minority opinions in United States v. Isaac, 141
F.3d 477, 482-84 (3d Cir. 1998).
881
The Probation Office also used a fraud loss number that was significantly higher than
the parties stipulated in the plea agreement. The court of appeals decision does not address that
issue. However, as I previously noted, in tax cases, the defendants counsel should be concerned
that this phenomenon could happen despite the parties agreement as to the tax loss number. I have
never seen it happen in a tax case, nor have I heard of it happening. Munoz reminds us that it is a
possibility even if remote.
878
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defendant objected but the Government signaled to the sentencing court that the abuse-of-trust
enhancement was appropriate. The defendant did not object at sentencing that the Governments
signal to the sentencing court violated the plea agreement. Based in part on the abuse-of-trust
enhancement, the sentencing court gave the defendant a more stringent sentence than contemplated
by the plea agreement. On appeal, the defendant did object. The Court of Appeals applied the more
stringent plain error review standard because the objection had not been made below, but noted plain
error is present where the Government fails to meet its plea bargain commits, a failure which
affects the fairness, integrity and public reputation of judicial proceedings. The Court applied
straight-forward benefit of the bargain analysis to resolve the issue. The Court found that the
Government had violated the plea agreement by advocating a position inconsistent with the plea
agreement. The Court remanded for resentencing before a different judge untainted by the
Governments advocacy of a position inconsistent with the plea agreement.882
Finally, in negotiating a plea, the practitioner must be aware that one USAO does not have
the authority to bind another USAO. So, for example, a promise by the USAO for SDNY not to
prosecute for a crime does not bind the USAO for SDTX. As a practical matter, however, another
USAO is not likely to pursue a crime that is within the scope of a plea agreement reached by another
USAO. More importantly in the current context involving tax crimes, since DOJ Tax controls all
tax prosecutions in all districts and controls the particular plea, DOJ Tax can commit in the plea
882
This is not as easy as it seems. In the plea agreement, the Government reserved the
right to dispute sentencing factors or facts material to sentencing. The Court nevertheless found
that the Government implicitly promised not to argue for an enhancement that was not part of the
plea agreement. (Emphasis supplied.) Hence, the defendant did not get the benefit of his bargain.
More subtly, it appears that the Governments position on the enhancement was only taken in
response to a direct question by the sentencing court as to whats your position. What was the
prosecutor to do? Literally, the question was whether the prosecutors position was that the
enhancement should apply. The prosecutor could have just said no, citing the plea agreement. But,
perhaps reading the question as to whether, on the facts (apart from the plea agreement), the
enhancement was appropriate, the prosecutor answered that it was. Surely, if the prosecutor thought
the enhancement was appropriate even though he had bargained away the Governments right to
advocate the enhancement, could he not advise the court that, academically, the enhancement was
appropriate? The Court of Appeals felt that, in overall context, the prosecutor had moved to
advocating a position inconsistent with the plea agreement. The Court reasoned that Although the
Government has a duty to provide the sentencing court with relevant factual information and to
correct misstatements, it may not hide behind this duty to advocate a position that contradicts its
promises in a plea agreement. And, even though later in the sentencing proceeding, the prosecutor
asked the court to sentence consistent with the plea agreement, the Court viewed that as mere lip
service after the prosecutor had advocated differently. The Court of Appeals reversed for resentencing before a different judge untainted by improper advocacy by the Government. Of course,
Munozs victory may be pyrrhic because the next sentencing judge may get to the same as the first,
but will do so independent from the Government taking a position on the enhancement.
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agreement to not prosecute and this will have the practical effect of binding all districts on potential
tax charges.883
B.
Federal Rules of Criminal Procedure Provisions.
FRCrP 11 deals with pleas. The Rule is quite long, so for present purposes, I hit just a few
highlights.
1.
Types of Pleas.
The types of pleas allowed are not guilty, guilty, and nolo contendere (which means,
essentially, Ill take conviction but wont plead guilty and wont admit my guilt).884 Nolo
contendere pleas must be approved by the court,885 and many courts will not approve them because
they equivocate on criminal culpability.886 More importantly, DOJ Tax has a policy of not agreeing
to nolo pleas in tax cases.887 A plea of guilty may also be made where the defendant denies guilt or
equivocates as to his guilty. This is called an Alford plea, named for the Supreme Court decision
in North Carolina v. Alford, 400 U.S. 25 (1970). DOJ Tax also has a policy of generally not
agreeing to Alford pleas.888 It is beyond the scope of this book to discuss the social and judicial
883
See e.g., the plea agreement reached for Douglas Steger by the USAO for SDNY
reported at 2008 TNT 135-54. The Steger agreement commits the USAO for SDNY and, with
respect to tax offenses, the Tax Division, Department of Justice. The import of this language, at
least to me, is that the tax offenses within the scope of the agreement are being resolved.
Nevertheless, there are some technical problems. DOJ Tax does not prosecute most cases (and, I
think, that at least theoretically when its attorneys do prosecute, they are designated as special
AUSAs). So, if I were drafting, the language, I would state that DOJ Tax will not approve the
prosecution of tax crimes within the scope of the agreement. Also, I presume that the scope of the
commitment would / should cover Title 18 crimes that would otherwise be controlled by DOJ Tax
because intimately related to tax violations. But, again, the text does not say that explicitly.
884
FRCP Rule 11(a)(1).
885
FRCP Rule 11(b).
886
For much the same reason, Courts will often not accept Alford pleas in which the
defendant pleads guilty but equivocates as to or denies criminal culpability. The term Alford plea
is based upon the Supreme Court decision in North Carolina v. Alford, 400 U.S. 25 (1970). This
happens sometimes happens after a plea of guilty otherwise regular (i.e., with no declaration of
innocence), but the defendant denies or equivocates on culpability to the probation officer who then
includes that denial in the PSR or at the sentencing hearing. That will almost invariably get the
courts attention for further inquiry and may result in the courts refusal to accept the plea.
887
CTM 5.01[4] (2008 ed.); see also CTM 1.11 (2008 ed.) )(requiring prior approvals
and citing USAM 6-4.320. The Department of Justice generally disfavors such nolo pleas. USAM
9-27.520 & 530.
888
CTM 5.01[5] (2008 ed.); see also CTM 1.11 (2008 ed.) (Requiring prior approvals
and citing USAM 6-4.330.
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utility of nolo contendere and Alford pleas.889 I do note that a sentencing judge who accepts the
Alford plea will be assuaged by the requirement that there be on the record a factual basis for the
plea, which will usually come from a presentation by the prosecution plus such other questioning
and evidentiary demands of the sentencing judge. Note that the nolo contendere is less troublesome
to the sentencing judge because the defendant is not denying guilt, but even for nolo contendere
pleas the prosecutor must insure that there is a factual basis for the plea.890
A court may approve a conditional plea, permitting the defendant to appeal the courts action
on pretrial motions.891
2.
Guilty Plea Must be Knowing.
In a procedure commonly referred to as a colloquy, the Court must review all the key
relevant considerations with the defendant and insure that defendant understands his rights and
voluntarily enters the plea.892 Among the key items are the maximum sentence and fine and
potential restitution. Usually, the sentencing will occur only after the guilty plea is approved.
Because the court will not then know the sentencing factors (which will be developed by the
Probation Officer and included in a Presentence Investigation Report (PSR)), the court will simply
state the maximum punishment and, if imposed by statute, the minimum punishment.
3.
The Court Must Determine the Factual Basis for Guilt.
The Court must determine that there is a factual basis for guilt.893
The purpose underlying this rule is to protect a defendant who may plead with an
understanding of the nature of the charge, but without realizing that his conduct does
not actually fall within the definition of the crime charged. Therefore, this factual
basis must appear in the record and must be sufficiently specific to allow the court
889
However, an introduction to the issues and arguments on their utility and disutility
may be found at Stephanos Bibas, Harmonizing Substantive-Criminal-Law Values and Criminal
Procedure, the Case of Alford and Nolo Contendere Pleas, 88 Cornell L. Rev. 1361 (2003); and
Albert W. Alschuler, Straining at Nats and Swallowing Camels: The Selective Morality of Professor
Bibas, 88 Cornell L. Rev. 1412 (2003). A good more recent student note is Jenny Elayne Ronis, The
Pragmatic Plea: Expanding Use of the Alford Plea to Promote Traditionally Conflicting Interests
of the Criminal Justice System, 83 Temp. L. Rev. 1389 (2010).
890
Indeed, even for pleas of guilty, there must be a factual basis, but the prosecutors
presentation of the factual basis will be admitted by the defendant pleading guilty, so that a
sentencing judge will be less concerned about whether the defendant is guilty in fact.
891
FRCRP Rule 11(a)(2).
892
FRCrP Rule 11(b) & (c).
893
FRCrP Rule 11(b)(3).
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to determine that the defendants conduct was within the ambit of that defined as
criminal.894
The determination of factual guilt is usually handled as part of the colloquy. Commonly, the
parties will have set forth in the plea agreement the essential facts upon which the plea is based and
this will be read during the colloquy, which the judge making such follow through inquiries as he
or she deems appropriate to the circumstances.
Is the person pleading guilty always guilty? Well, if the definition of guilty is that there is
a determination by the trial court that he or she was guilty, then he or she is guilty because the court
will make that determination. But, what about the truly innocent person who pleads guilty because
he or she is risk averse as to the downside if he or she goes to trial and is innocently convicted on
the basis of a plea?895
4.
Court May Reject Plea Agreement.
The Court may reject the plea agreement.896 This is rare. The Court may not modify the
plea.897
894
This sentence is a quote from United States v. Reasor, 418 F.3d 466 (5th Cir. 2005),
which reversed for failure of the determinations made by the court to establish the statutes required
nexus for the crime to affect interstate commerce. I omit the quotation marks (including internal
quotation marks) and the case citations for easier readability.
895
Ah, but you say the plea colloquy will prevent that from happening. Not so. Lets
say, for example (inspired by the KPMG criminal case), that the defendant never in fact had the
willfulness that is the element of the crime but has been counseled that, some innocent people are
convicted even in the best of worlds and, moreover, because he is lumped in a general conspiracy
charge with others who did commit the crime charged, he stands an even higher risk of conviction.
Further, if he goes to trial, because of the amount of tax loss involved, the sentence could be likely
20+ years. Finally, it will wipe out his net worth and his familys ability to support themselves to
mount the type of defense he would need to even hope for acquittal. If the prosecution offers that
defendant a one count plea with a maximum 5 year sentence, that defendant might come to believe,
at least for purposes of passing the colloquy the court will give him, that he was really guilty of the
crime. This is just to say that the innocent may be more risk-averse than the guilty (who by
committing the crime in the beginning are less risk averse). See Robert E. Scott & William J.
Stuntz, Plea Bargaining as Contract, 101 Yale L.J. 1909, 1943 (1992). Did an innocent person plead
in the case that inspired this example? Two defendants did plead guilty. I dont know whether
either was innocent or guilty, but have my suspicions that at least one of them was influenced by
circumstances other than pristine guilt or innocence to make the plea. But, given the fact that
innocent people are convicted, should we deny the innocent the right to avoid an erroneous
conviction by pleading guilty to a lesser charge? For my further ruminations in this context, see my
blog entitled A Tax Crimes Fable - Plea Dilemmas for the Innocent Defendants.
896
FRCrP Rule 11(e)(4).
897
FRCrP Rule 11(c)(3)(A). See United States v. Scanlon, 2011 U.S. App. LEXIS 1164
(D.C. Cir. 2012).
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C.
Relevant Sentencing Guidelines.
6B1.2. Standards for Acceptance of Plea Agreements (Policy Statement)

(a) In the case of a plea agreement that includes the dismissal of any charges
or an agreement not to pursue potential charges (Rule 11(c)(1)(A)), the court may
accept the agreement if the court determines, for reasons stated on the record, that
the remaining charges adequately reflect the seriousness of the actual offense
behavior and that accepting the agreement will not undermine the statutory purposes
of sentencing or the sentencing guidelines.
However, a plea agreement that includes the dismissal of a charge or a plea
agreement not to pursue a potential charge shall not preclude the conduct underlying
such charge from being considered under the provisions of 1B1.3 (Relevant
Conduct) in connection with the count(s) of which the defendant is convicted.
(b) In the case of a plea agreement that includes a nonbinding
recommendation (Rule 11(c)(1)(B)), the court may accept the recommendation if the
court is satisfied either that:
(1) the recommended sentence is within the applicable guideline range; or
(2)(A) the recommended sentence departs from the applicable guideline
range for justifiable reasons; and (B) those reasons are specifically set forth
in writing in the statement of reasons or judgment and commitment order.
(c) In the case of a plea agreement that includes a specific sentence (Rule
11(c)(1)(c)), the court may accept the agreement if the court is satisfied either that:
(1) the agreed sentence is within the applicable guideline range; or
(2)(A) the agreed sentence departs from the applicable guideline
range for justifiable reasons; and (B) those reasons are specifically set forth
in writing in the statement of reasons or judgment and commitment order.
D.
Plea Bargaining Under the Guidelines - Some Thoughts
1. Before entering negotiations, familiarize yourself with the prosecutors policies and where
there may be discretion. An AUSAs discretion in a tax case may be limited by the DOJ Tax CES
which will usually state one or sometimes two major counts that must be agreed upon. I discuss
those policies below.
2. Know the judges policies and predilections in this area. If you know them, you may be
able to make effective presentations that will sway him or her. If nothing else, you will be better
prepared to advise your client as to the range of results to expect upon sentencing.
3. Always calculate the numbers when considering plea alternatives. As noted above, often
what appears to be a significant concession by the prosecutor is just cosmetics in terms of the
sentence. In this regard, pay particular attention to relevant conduct. And, if possible, nail down
the tax loss numbers.
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4. As noted in the excerpt, consider sentence bargaining under Rule 11(c)(1)(c).898 This will
give the defendant certainty as to the sentence and, if the Court rejects the bargain, the opportunity
to withdraw the plea of guilty.899 What factors should you anticipate the Court will consider in
making the decision whether to accept a Rule 11(c)(1)(c) plea? Consider the following opening
salvo from a recent decision:900
Prosecutors and defense lawyers sometimes enter into binding plea
agreements that require a judge to impose a particular sentence or apply a particular
sentencing range that is above or below that produced by proper application of the
advisory Guidelines. When such a plea agreement smells too much like cow manure
siphoned from a feedlot after a swampy, summer rain, n1 judges should not pretend
the odor is lilac. On the other hand, if the plea agreement stinks, but the stench is
more like kitty litter than cow manure, a judge should hold his or her nose and move
on. The trick is to discern the difference.901
Later in the opinion, the Judge reasons:
Because the Guidelines almost always reflect the harmonization of all the
statutory purposes of sentencing in a way that has been consistently approved both
explicitly and implicitly by Congress, I read Booker to require a sentencing judge to
exercise his or her discretion in a way that gives significant deference to the
Guidelines. In other words, most sentences should be within the advisory
Guidelines. But, Booker also gives judges the power (discretion) to vary from the
Guidelines by examining the statutory goals of sentencing outside the lens of the
advisory Guidelines. Recognizing that the Guidelines are truly advisory, how, then,
does one decide to accept or reject a Rule 11(c)(1)(c) plea agreement that calls for
a sentence or range outside the Guidelines?
Since plea bargaining can make a mockery of the advisory Guidelines, and
those Guidelines should be given great weight after Booker, a judge should reject a
Rule 11(c)(1)(c) plea agreement if there is not a fit between the terms of the plea
agreement and the Guidelines. On the other hand, the fit need not be perfect. There
are two approaches that will tell us whether the fit is snug enough.
898
Current FRCrP Rule 11(c)(1)(C).

See United States v. Pimentel, et al., 932 F.2d 1029 (2d Cir. 1991) (suggesting that
sentence bargaining, as opposed to charge bargaining, may be the better part of wisdom under the
Guidelines).
900
United States v. Coney, 390 F.Supp 2d 844 (D. Neb. 9/8/05).
901
The judge digresses in footnote one at this point as follows: Some say I know a lot
about manure. While in the practice, I litigated (and, I am proud as punch to say, won) a case
involving a fight over the value of cow manure harvested from a feedlot. Thereafter, my law partners
often remarked that the great BS case was the high point of my career. They were right.
899
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The judge then proceeds to treat the Guidelines with deference under his view of the Booker
regime and states that if the Rule 11(c)(1)(c) plea would be outside the Guidelines, then the
following standard should apply in determining whether to accept the plea:
If a Rule 11(c)(1)(c) plea agreement requires a sentence or sentencing range
outside the Guidelines, and the plea agreement cannot honestly be justified by
reference to a specific provision of the Guidelines, a judge should presume that the
plea agreement is improper and therefore the judge should reject it unless the parties
can demonstrate that (1) use of the bargained-for sentence or range will not
undermine the Guidelines and (2) there is a compelling reason for implementing the
agreement.
It is not possible to categorize all the circumstances where this approach
might warrant the adoption of a binding plea agreement that appears inconsistent
with the Guidelines. This is because this second approach is purposefully broad in
fidelity to Bookers command that a sentencing judge must be sensitive not only to
the advisory Guidelines, but also to the statutory goals of sentencing. This rule is
not, however, easy to satisfy because it presumes that the plea agreement will be
rejected unless the parties can demonstrate no real harm to the advisory Guidelines
and a compelling reason for doing something different.
Thus, if the judge, after a skeptical and probing inquiry of counsel, concludes
that the binding plea agreement, while above or below the advisory Guidelines, does
not undermine the purposes of the Guidelines and is premised upon very persuasive
reasons, the judge will adopt the plea agreement and sentence the defendant
accordingly. In that event, the judge will not change the Guidelines calculations or
purport to depart from the advisory Guidelines. On the contrary, the judge will
express his or her decision as a variance from the Guidelines based upon a binding
plea agreement that has been implemented for specified reasons.
5. If such a plea cannot be arranged, at least consider reaching agreement as to as many of
the components of the Guidelines equation as possible, so as to narrow the possibility of surprise.
Virtually any significant factor can be negotiated and agreed upon, with the proviso that the plea can
be withdrawn if the court does not agree to the terms.902 Many U.S. Attorneys limit the authority
to enter into such agreements. Nevertheless, this opportunity should be considered. At a minimum,
you should make sure that you have discussed with the prosecutor and identified each factor that
could affect the sentence.903
902
Santobello v. New York, 404 U.S. 257, 262 (1971).

See Pimentel, supra (noting that, in the 2d Circuit, at least, the prosecutor has an
obligation to notify the defendant of the factors that might negatively affect sentencing, an obligation
that has lead to a practice in that circuit of the prosecutor sending to defense counsel so-called
Pimentel letters setting forth those factors in order to be able to show at sentencing that the
defendant was aware in the plea bargain process; for an example of a recent case in which Pimentel
letter was used, see United States v. McLeod, 251 F.3d 78 (2d Cir. 2001)).
903
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6. If the plea involves cooperation with the prosecution in investigating and /or prosecuting
against others, attempt to commit the prosecution to move for a substantial assistance departure. As
noted above, the law generally is that such a motion is in the prosecutions discretion, unless it has
committed in some way to make the motion. Also, keep in mind that, depending on the strength of
the defendants hand (i.e., the value he brings to the table for the prosecution), he may obtain
collateral agreements in his or her favor.904
E.
DOJ Tax Plea Policies.
I have noted above that the IRS is the major initial investigating force and starts most
criminal tax investigations. The IRS, however, has no authority to negotiate a plea with a taxpayer
wanting to truncate what would otherwise be a slow process as it winds its way through the IRS,
through DOJ Tax CES, then to the USAO, and through a trial. The DOJ, either through DOJ Tax
CES or the United States Attorneys office, must negotiate a plea agreement, and then all such
agreements must be consistent with the DOJ Tax CESs plea policy, key components of which are:
The letter transmitting the case from DOJ Tax CES to the US Attorney will designate
one of the counts as a major count for which a plea may be accepted without further
DOJ Tax approval.905 The CTM provides:
The major count policy is intended to promote deterrence,
ensure that a defendant will be held accountable at sentencing for the
most serious readily provable offense, and eliminate the defendants
ability to contest the criminal conduct in any subsequent civil tax
proceeding.
The designation of the major count is based on the following
considerations:
a. felony counts take priority over misdemeanor counts;
b. tax evasion counts (26 U.S.C. 7201) take priority over
other substantive tax counts;
c. the count charged in the indictment or information that
carries the longest prison sentence is the major count;
d. as between counts under the same statute, the count
involving the greatest financial harm to the United States (i.e., the
greatest additional tax due and owing) will be considered the major
count; and
904
For example, in United States v. Almeida, 341 F.3d 1318, 1320 n. 5 (11th Cir. 2003),
the prosecution agreed to at least consider a 5K substantial assistance departure and
2) recommend to the appropriate federal agencies that the defendant be considered
for an S visa, if he meets their other criteria; and, 3) recommend to the appropriate
federal agencies that the defendant and members of his immediate family residing
in the United States be considered for admission into the Witness Security Program,
if appropriate.
905
CTM 5.01 (2008 ed.); citing USAM 6-4.310 and 6-4.311.
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e. when there is little difference in financial harm between

counts under the same statute, the determining factor will be the
severity of the conduct.
If separate groups are involved under the grouping rules, DOJ Tax CES may
designate the major count in each group.906
If tax and non-tax charges are made, DOJ Tax CES may designate a less serious tax
offense as the major count provided that it will not affect the sentencing range and
adequate justification for a deviation of DOJ Tax CES policy.
Nolo Contendere Pleas will not be agreed to.907 A defendant pleading nolo
contendere agrees that he may be convicted but does not plead guilty or admit guilt.
A defendant pleading nolo contendere is not collaterally estopped from denying his
guilt in any subsequent proceedings. For example, a defendant pleading nolo to tax
evasion is not collaterally estopped from contesting the application of the civil fraud
penalty.
Only in the most unusual circumstances will Alford908 pleas be agreed to.909 Alford
pleas are guilty pleas where the defendant continues to maintain his or her innocence
or at least equivocates as to guilt. The Alford plea is similar concept to the nolo
contendere plea and differs principally in that the defendant in the Alford plea is
collaterally estopped from denying guilt (even though he admitted guilt with
protestations of innocence).910 In the example above, a defendant entering an Alford
plea to tax evasion would be collaterally estopped from contesting the application of
the civil fraud penalty. The Supreme Court approved such pleas in Alford, but DOJ
disfavors them because it could be viewed as suggesting prosecutorial overreaching.
The approval of AAG, DOJ Tax is required.
DOJs general position is that the civil tax liability will not be resolved in the
criminal proceeding, including the plea negotiations.911 However, components or
906
CTM 5.01[2] (2008 ed.).

CTM 5.01[4] (2008 ed.).
908
The term Alford pleas is derived from the Supreme Court decision in North
Carolina v. Alford, 400 U.S. 25 (1970) and is now a term of art in the criminal lexicon.
909
CTM 5.01[5] (2008 ed.).
910
Another distinction is that, in the nolo contendere plea, the defendant does not deny
guilt but simply commits not to contest guilt, whereas in the Alford plea the defendant denies his
guilt. Stephanos Bibas, Harmonizing Substantive-Criminal-Law Values and Criminal Procedure,
the Case of Alford and Nolo Contendere Pleas, 88 Cornell L. Rev. 1361, 1373 (2003).
911
DOJ CTM 5.01[7] (2008 ed.) The IRS has a similar policy applicable during the CI
investigation phase, as well as after the matter has been referred to DOJ Tax. The IRS will also
generally forego any enforcement action that may impinge on the criminal investigation or
prosecution. See IRM 1.2.13.1.11 Policy Statement 4-26 (Formerly P-4-84) (Approved
907
- 387 -
facts that enter into the determination of civil tax liability may be resolved. For
example, a defendant may in the plea documents admit that he or she received certain
amounts of unreported income or claimed certain amounts of improper deductions
or credits. Further, a defendant may stipulate that he or she committed fraud. An
agreement may include a requirement that the defendant promptly file original or
amended returns as appropriate and pay the indicated tax liabilities (which, as to
amount is not binding on the IRS). Finally, DOJ Tax has recently been requiring that
tax liability be quantified in the amount of the asserted tax loss number (at least the
minimum the IRS may want to assert), along with penalties and interest so that the
plea agreement can authorize contractual restitution (remember that, absent the
defendants agreement, restitution is not allowed in tax cases because the IRS has
alternative means to determine and collect the tax liability). The pleading defendant
will agree to file the appropriate delinquent or amended returns reporting the
principal amount of tax liability which will then permit the IRS to assess that
amount, plus the interest and agreed upon penalty. The defendant may not have any
choice if the Government insists upon such restitution as part of the plea, but one
very important advantage for the defendant is a potential break for extraordinary
restitution. The IRS may then later assert increases in the tax or in the penalties,
assuming the civil statute of limitations is open as it usually is in criminal tax cases.
The payment of taxes and other monetary amounts is not a satisfactory resolution of
the case at sentencing; the Government wants jail time.912
F.
Expedited Plea Program.
The IRS and DOJ Tax CES have an expedited plea program (previously sometimes referred
to as the simultaneous pleaor early plea program) which permits fast-track disposition of a
criminal investigation by a process that results in an expedited plea consistent with DOJ Tax CESs
major count plea policy.913 As noted elsewhere, the process from the start of the investigation
through the final conviction can be quite lengthy indeed, and while the process is going on the
taxpayer has the sword of Damocles hanging over his head, is likely to be incurring substantial
ongoing costs (e.g., attorneys fees), and is unable to get on with his life. The taxpayer may thus
simply want to take his punishment expeditiously and move on. The early plea program is designed
to allow that to happen.
The program is available only if legal source income is involved (e.g., no narcotics or
organized crime). The taxpayers lawyer contacts the CI Special Agent to commence the process.
The process then is abbreviated, with a review for legal sufficiency and referral to both the U.S.
Attorney and DOJ Tax CES. DOJ Tax must still approve indictment and DOJ (either a DOJ Tax
CES attorney or an AUSA) will formally negotiate the actual plea agreement. DOJ Tax CESs
10-05-2005).
912
913
CTM 5.01[7] (2008 ed.).

CTM 5.02 (2008 ed.), citing Tax Division Directive 111.
- 388 -
policies require that CI assure that it has adequately developed the case in order to insure that the
fast track negotiations do not result in giving away too much.
G.
Proffers and Negotiating Pleas.

1.
Proffers.
During the course of a criminal investigation conducted by the DOJ (including DOJ Tax
CES), particularly a grand jury investigation, the DOJ may be interested in interviewing a target or
subject of the investigation incident to considering a possible plea. As I develop in the discussion
of grand jury investigations below,914 a target is a person in the prosecutorial sight of the prosecutor
in the investigation; a subject is someone who, based on the facts known to the prosecutor, is not a
target but may become one. Less often, the target or subject may request an interview with the
prosecutor in order to present exculpatory or mitigating information that could not be otherwise
effectively presented only through defense counsel. The interview is referred to as a proffer.915
The proffer is part of the plea process, even though the process may result in the subject or
target avoiding an indictment. Most of the time, the request for a proffer is made by the prosecutor;
in my further discussion in this section, I will assume that the prosecutor seeks the interview. The
prosecutors request for a proffer may be at such an early stage of the investigation that a specific
plea will not be actually on the table for consideration. The prosecutor may also request a proffer
after developing a lot of information is just seeking to cover a few points, or, with luck, even get
some statements that could be used to prove the target or subject guilty of something (even, as with
Martha Stewart, it is simply lying during the interview).
The defendant is not required to make the proffer, but he often will not be able to strike a
plea deal or mitigate the charges to be specified in the indictment without such a proffer. The issue
that the defense attorney must address in counseling the target or subject whether to make a proffer
is what use the prosecutor can make of the defendants statements if they fail to reach an disposition
either by plea or by prosecutorial judgment call not to prosecute.
The general rule embodied in the Federal Rules of Evidence is that statements made in
plea bargaining (including the proffer) are settlement negotiations and thus may not be used against
the defendant in any civil or criminal proceedings, except in very narrow circumstances.916 So the
defense attorney may be lulled into thinking that the proffer is a no lose situation either the
defendant will (i) reach an acceptable plea agreement or perhaps even avoid indictment altogether
or (ii) the worse that can happen is that the parties will fail to reach a plea agreement. FRE Rule
410(3) precludes using the bare proffer against the defendant in a subsequent proceedings, but that
does not mean that there is no way the proffer can hurt the defendant. For example, as in discussing
914
See text beginning at p. 522.

A proffer may consist of a unilateral statement, often written, but more often the
prosecutor insists upon the interview process because it permits cross-examination of the statements.
916
FRE 410 and F.R.Crim.P. Rule 11(f) (cross-referencing FRE Rule 410). Although
these rules are independent of the immunity rules discussed later, they have the same practical effect.
915
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sentencing, the sentencing court is not bound by the evidentiary rules in determining an appropriate
sentence, so that the sentencing court could consider an attempt to obstruct justice via the proffer.
In addition, statements made during the proffer could lead to other evidence that can be used against
the defendant, without directly using the statements in the proffer itself.917
More importantly in the real world, prosecutors avoid bare proffers giving the benefit of FRE
Rule 410. More likely, the prosecutor will insist that the proffer be made pursuant to a proffer letter
from the United States attorney to the defendant that, upon signing by the target or subject and his
or her counsel will be a contractual waiver of many rights. That proffer letter often referred to as
a Queen for a Day letter contracts away some of the rights the defendant is given in a bare
proffer under Rule 410.918 Consider the following proffer terms from a proffer letter in a recent case
from the Southern District of New York:919
(1) THIS IS NOT A COOPERATION AGREEMENT. The Client has agreed
to provide the Government with information, and to respond to questions, so that the
Government may evaluate Client's information and responses in making prosecutive
decisions. By receiving Client's proffer, the Government does not agree to make a
motion on the Client's behalf or to enter into a cooperation agreement, plea
agreement, immunity or non-prosecution agreement. The Government makes no
representation about the likelihood that any such agreement will be reached in
connection with this proffer.
(2) In any prosecution brought against Client by this Office, except as
provided below the Government will not offer in evidence on its case-in-chief, or in
connection with any sentencing proceeding for the purpose of determining an
appropriate sentence, any statements made by Client at the meeting, except in a
prosecution for false statements, obstruction of justice or perjury with respect to any
acts committed or statements made during or after the meeting or testimony given
after the meeting.
(3) Notwithstanding item (2) above: (a) the Government may use information
derived directly or indirectly from the meeting for the purpose of obtaining leads to
other evidence, which evidence may be used in any prosecution of Client by the
Government; (b) in any prosecution brought against Client, the Government may use
statements made by Client at the meeting and all evidence obtained directly or
indirectly therefrom for the purpose of cross-examination should Client testify; and
(c) the Government may also use statements made by Client at the meeting to rebut
any evidence or arguments offered by or on behalf of Client (including arguments
917
This process is the same as the difference between use immunity and derivative use
immunity. I discuss immunity elsewhere in this text.
918
For a good recent discussion of these agreements, see Benjamin Naftalis, Queen for
a Day Agreements and the Proper Scope of Permissible Waiver of the Federal Plea-Statement
Rules, 37 Colum. J.L. & Soc. Probs. 1 (2003).
919
United States v. Parra, 2004 U.S. Dist. LEXIS 745 (SD NY 2004).
- 390 -
made or issues raised sua sponte by the District Court) at any stage of the criminal
prosecution (including bail, all phases of trial, and sentencing) in any prosecution
brought against Client.
(4) The Client understands and agrees that in the event the Client seeks to
qualify for a reduction in sentence under Title 18, United States Code, Section 3553
(f) or United States Sentencing Guidelines, Sections 2D1.1(b) (6) or 5C1.2, the
Office may offer in evidence, in connection with the sentencing, statements made by
the Client at the meeting and all evidence obtained directly or indirectly therefrom.
(5) To the extent that the Government is entitled under this Agreement to
offer in evidence any statements made by Client or leads obtained therefrom, Client
shall assert no claim under the United States Constitution, any statute, Rule 11(e)(6)
of the Federal Rules of Criminal Procedure,920 Rule 410 of the Federal Rules of
Evidence, or any other federal rule that such statements or any leads therefrom
should be suppressed. It is the intent of this Agreement to waive all rights in the
foregoing respects.
(6) If this Office receives a request from another prosecutor's office for access
to information obtained pursuant to this Proffer Agreement, this Office may furnish
such information but will do so only on the condition that the requesting office honor
the provisions of this Agreement.
(7) It is further understood that this Agreement is limited to the statements
made by Client at the meeting and does not apply to any oral, written or recorded
statements made by Client at any other time. No understandings, promises,
agreements and/or conditions have been entered into with respect to the meeting
other than those set forth in this Agreement and none will be entered into unless in
writing and signed by all parties.
(8) The understandings set forth in paragraphs 1 through 7 above extend to
the continuation of this meeting on the dates that appear below.
(9) Client and Attorney acknowledge that they have fully discussed and
understand every paragraph and clause in this Agreement and the consequences
thereof.
As you can see from the contract, the statements the target or subject makes in the proffer can be
used against him or her in impeachment at trial to counteract a defense contrary to the statements
made in the proffer.921 Of course, if the target or subject, then a defendant, mounts that defense with
920
This rule have been deleted from the FRCrP and now Rule 11(f) contains a crossreference to FRE 401.
921
See United States v. Mezzanatto, 513 U.S. 196, 207 (1995) (prosecutors may
condition cooperation discussions on an agreement that the testimony provided may be used for
- 391 -
his or her own testimony, the prosecution can use the proffer statements to impeach or rebut the
defendants testimony. But, that defendant may exercise his or her Fifth Amendment right not to
testify while still mounting a defense through other evidence and argument and even implication
from the other evidence. If the defendant does that affirmatively, the proffer statements may be
introduced into evidence 922 and could be quite damning. And, as you can gather, the statements can
be used in other ways (e.g., at sentencing) to adversely affect the defendant. Some of these uses
would be permissible under Rule 410 anyway, but to the extent that they would not be permissible,
then the target or subject is contracting away his right to complain.
For these reasons, defense counsel representing a target or subject must consider carefully
whether to make a proffer under these conditions and advise the client of the serious risks involved.
These proffers may be viewed as somewhat like an appearance before the grand jury. I discuss the
grand jury investigation and target or subject appearance in more detail below.923 For present
purposes, the principal difference is that the target or subjects counsel is present in a proffer session
but not in a grand jury session. In both types of sessions, the witness statements are recorded for
potential future use against the witness.924 The general rule in criminal defense is that a target or
subject does not appear before the grand jury voluntarily and, if compelled to appear by subpoena,
asserts the Fifth Amendment to virtually every question. With that grand jury background, the
question is whether the witness who is a target or subject should appear in a proffer session.
Advising the client whether to participate in a proffer session on the prosecutors onerous terms and
/ or whether to participate in a grand jury session is always heavily fact dependent. I cannot
perceive a general rule as to whether or not to participate in proffer sessions. To be sure, just as with
grand jury sessions, proffer sessions are fraught with risk.925 Without some very affirmative and
very positive goal and some reasonable likelihood of achieving it, therefore, my general rule is not
to give them.
impeachment purposes.).
922
United States v. Rebbe, 314 F.3d 402 (9th Cir. 2002); and United States v. Velez, 354
F.3d 190 (2d Cir. 2004), both citing United States v. Mezzanatto, 513 U.S. 196, 200-203 (1998),
dealing with a related facet of the question.
923
924
Rule 6(e) requires recording of the grand jury proceedings. My experience in proffer
sessions is that, while they are not formally recorded, the prosecution team will include at least one
and usually two agents whose principal purpose at the proffer session is to make extensive notes of
the witness statements for future use against the witness. That is why, in these proffer sessions, the
defense counsel team will include at least one defense counsel and one other person (perhaps another
defense counsel) whose principal function is to make detailed notes.
925
One judge has noted that, in the bargaining over the scope of the QFAD, the
prosecution dictates the terms, the witness gets only the chance to convince the prosecution not to
prosecute, and takes all the risk. United States v. Duffy, 133 E Supp. 2d 213, 217 (E.D.N.Y. 2001).
See also Barry Tarlow, Queen for a Day -- Proffer Your Life Away, 29 Champion 53 (2005)
(quoting a federal prosecutor as saying, after the QFAD practice first developed, he could never
understand why defense lawyers would agree to participate in this relatively new, one-sided
procedure that was totally restructuring the plea negotiation process.).
- 392 -
I will discuss the Governments policies, now incorporated into what is called the McNulty
memo, that in prior versions have had the effect of forcing organizations potentially subject to
indictment to withhold legal fees to employees who did not cooperate by participating in proffer
sessions and, thus, compromising their Fifth Amendment rights. In two decisions in United States
v. Stein, reported at 440 F.Supp.2d 315 (S.D.N.Y. 2006) and 495 F.Supp. 2d 390 (S.D.N.Y. 2007),
respectively, the court strongly criticized DOJs prior policies and held that such government
pressure on an organization causing the advancement of attorneys fees for employees and former
employees to be a violation of the Sixth Amendment and dismissed indictments for the violation.
In response to the first decision in the case and criticisms from many other fronts, DOJ changed the
policy via the McNulty Memorandum which is discussed elsewhere in this text. This aspect of Stein
is currently on appeal to the 2d Circuit.
2.
Other Aspects of Negotiating the Plea.
Considering whether or not to plea is an exercise in crystal-balling. Can the defendant do

better if he goes to trial? Essentially some form of cost / benefit analysis is required, because the
costs of going to trial in emotional turmoil and legal fees may be great indeed. Usually, at least in
the case of tax crimes, as noted elsewhere, the Government usually brings only the strongest of cases
after an extensive investigation. And, the Government will then offer a plea agreement that, based
on the odds, is at least as good and most times better than the defendant could anticipate after trial.
So many and, in tax cases, most defendants find that the cost / benefit analysis tilts in favor of a plea.
Once a case is pled, the issue of what result could have been obtained if the defendant had not pled
and gone to trial is moot.
In multi-defendant cases, the Government will attempt to buttress its case against the more
culpable of the defendants by offering an attractive plea to one or more of the less culpable
defendants. When that occurs, of course, the defendant receiving such an offer must undertake the
same analysis. Of course, should he take the plea, there will be remaining defendants who may not
plea and thus the pleading defendant will be able to have some insight as to what would have
happened had he or she gone to trial. If the other defendants are acquitted, it might well be that the
pleading defendant would have been acquitted also.
One variation of this theme occurred in the KPMG individual defendant prosecution in
United States v. Stein ballyhooed as the largest tax crime prosecution in history but which will go
down in legal history as the case where the prosecutors were punished by dismissal of most of the
defendants prosecutorial abuse in forcing KPMG to cut off payment of their attorneys fees. The
original superseding indictment named 19 individuals. The Government offered pleas to some of
the 19 early on, but only had one taker, one David Rivkin, who pled to 2 felony counts (one for
conspiracy and the other for tax evasion), perhaps motivated in significant part by KPMGs
withdrawal of financial support at the Governments demand. Subsequently, the district court
dismissed 13 of the KPMG defendants because of the noted prosecutorial abuse and, had Rivkin not
pled early in the process, he would have been dismissed as a defendant. This was a plea too early,
but in order to make the plea, Rivkin had to perform the allocution where he admitted his guilt.
- 393 -
Thus, after the others were dismissed, he certainly knew that he had pled too early.926 Of the
remaining 5 defendants, one pled guilty before trial, one outlier to the KPMG tax shelter enterprise
was acquitted, and the three others, including a lawyer at the center, were convicted. (Postscript:
Rivkins two count plea did not hurt him.)
H.
Pleas and Appeals.
I refer the reader to the prior discussion of appeals waivers beginning on p. 375.
I.
Pleas and Guidelines Calculations.
I conclude the discussion of pleas with a reminder of the importance of Sentencing Guideline
calculations. Every defendant should consider a plea, if for no other reason than obtaining the
acceptance of responsibility downward adjustment or the possibility of obtaining a 5K1 adjustment
for substantial assistance. The attorney negotiating the plea agreement must know the clients
incarceration exposure under the plea (and indeed must negotiate the plea to minimize the exposure)
and the clients exposure if the client goes to trial. The attorney disserves the client if he or she gets
this wrong, and the attorney will be subject to ineffective assistance of counsel claims and
potentially malpractice also.
In a recent nontax case,927 the prosecutor offered a plea agreement which had a maximum
incarceration exposure of 48 months. The defendant alleged that he decided to reject the offer based
upon his counsels advice that the defendants maximum incarceration exposure if he went to trial
was 51 months. With only a 3 month maximum difference, the defendant decided to roll the dice
with a trial. Upon conviction, the defendant was sentenced to 78 months. The defendant moved to
vacate his sentence. On appeal, the defendant alleged ineffective assistance of counsel. In
remanding for an evidentiary hearing as to whether the attorney gave the alleged advice and the
defendant relied upon it, the Fifth Circuit pronounced:
One of the most important duties of an attorney representing a criminal
defendant is advising the defendant about whether he should plead guilty. An
attorney fulfills this obligation by informing the defendant about the relevant
circumstances and the likely consequences of a plea. Apprising a defendant about his
exposure under the sentencing guidelines is necessarily part of this process. A
defendant cannot make an intelligent choice about whether to accept a plea offer
unless he fully understands the risks of proceeding to trial. Failing to properly
advise the defendant of the maximum sentence that he could receive falls below the
objective standard required by [Fifth Circuit precedent].
****
926
For those wishing more information on this particular anecdotal instance of a plea
too soon, see my blog at: http://federaltaxcrimes.blogspot.com/2009/07/guilty-plea-too-soon.html.
927
United States v. Herrera, 412 F.3d 577 (5th Cir. 2005).
- 394 -
* * * Herrera faced a sentencing range under the guidelines where the precise
advice of counsel was essential to deciding whether to accept the Governments plea
offer. If the attorney actually advised Herrera that he faced a maximum of 51 months
of prison time, Herrera did not fully understand the risks of going to trial. An
attorney who underestimates his clients sentencing exposure by 27 months performs
deficiently because he does not provide his client with the information needed to
make an informed decision about accepting a plea offer or going to trial.
Also consider the following in a case where the court found the defendants lawyer to be able
and a man of integrity but nevertheless found the attorneys representation deficient because the
lawyer failed to advise the defendant early in the case of the importance of cooperation with the
government as a means of reducing his sentence. The Court reasoned:
[Under the Sentencing Guidelines,] counsel's ability to persuade a judge or jury is
now far less important than his ability to persuade the prosecutor that the defendant
should be allowed to cooperate with the government and thereby obtain a 5K1.1
letter, which will enable the judge to depart from the sentence that the Guidelines
would otherwise mandate. The Court concludes that, in the age of the Sentencing
Guidelines, it is malpractice for a lawyer to fail to give his client timely advice
concerning the importance of cooperation with the government as a means of
reducing the defendant's sentence.928
Finally, I discuss below a related theme where the Supreme Court has reminded practitioners
that they must know the immigration consequences of their sentence.
To my students. This is, in the auctioneers term, Fair Warning. Know thy Guidelines!
J.
Withdrawing Guilty Pleas.
Defendants will sometimes want to withdraw their pleas. I am sure you can appreciate that
this might be difficult because of the admissions made in the plea agreement and the thoroughness
of the plea colloquy in which the defendant must unequivocally admit his guilt to the crime that the
Government outlines at the plea hearing. FRCrP Rule 11(d)(2)(B) permits the withdrawal of an
accepted guilty plea before sentencing if the defendant can show a fair and just reason for
requesting the withdrawal. A typical list of the factors a court must consider in deciding whether
to permit a plea to be withdrawn is: (1) whether the defendant asserts his innocence; (2) the
strength of the defendant's reasons for withdrawing the plea; and (3) whether the government would
be prejudiced by the withdrawal.929 A mere change of mind is insufficient.
928
United States v. Fernandez, No. 98 CR. 961 JSM, 2000 WL 534449, at *2 (S.D.N.Y.
May 3, 2000), adhered to on reconsideration, 2000 WL 815913 (S.D.N.Y. June 22, 2000) 2000 WL
534449, as quoted in Sigmun Popko and Jon M. Sands, The Conundrum of Discussing Cooperation
with Defendants, 28 Champion 53 (2001).
929
United States v. Jones, 336 F.3d 245, 252 (3d Cir. 2003).
- 395 -
K.
Collateral Consequences of Plea Agreements and Allocutions.
Defense attorneys should always keep in mind that the criminal trial and particularly
convictions can have collateral consequences to defendants. Most immediately in a tax setting, a
conviction can be proof or, at least, evidence of fraud so as to open up tax years otherwise closed
by the statute of limitations and support the 75% civil fraud penalty. I discuss elsewhere the
collateral estoppel consequences of convictions for tax evasion. Other tax crimes most
prominently tax perjury, 7206(1) does not per se have such preclusive collateral estoppel effects.
However, particularly in the plea agreement and in allocutions, there is some context for the bare,
usually generally count(s) of conviction. That context may offer specific admissions of fraud or
conduct from which a fair inference of fraud can be made.930 If defense counsel wants to hold open
the defendants opportunity to avoid civil fraud, the defense attorney must be careful to shape the
admissions and other evidence to mitigate the risk of it being conclusive or persuasive as to fraud.
IV.
Lesser Included Offenses; Doctrine of Merger; Joinder.

A.
Introduction to the Lesser Included Offense Concept.
In discussing the Title 26 substantive tax crimes and the Title 18 offenses that are deployed
in tax related cases, we saw substantial overlap in the tax related offenses, a phenomenon true in
other areas of the law. Focusing just on the elements of the offenses, a more serious offense may
overlap with another less serious offense. The classic tax crimes example is that, in the context of
evasion of assessment accomplished by a fraudulent return, the elements of tax evasion under
7201, a five year felony, substantially overlap with the elements of fraudulent or false documents
offense under 7207, a one year misdemeanor, or even with the elements of tax perjury offense
under 7206(1), a three year felony. The prosecutor has virtually untrammeled discretion in
determining which of these offenses to present to the grand jury for indictment.931 So, the prosecutor
may obtain an indictment for the greater offenses or even the greater offense and one or more
overlapping lesser offenses. I deal in this section with some of the consequences of overlapping
offenses where one of the offenses has a greater incarceration period (the greater offense) and one
has a lesser incarceration period (the lesser offense).
The consequences are dealt with under the rubric of the lesser included offense concept. As
we will see, the lesser included offense concept is deployed to affect several key consequences in
the criminal process. An author has summarized the contexts in which it is used as follows:
The doctrine of lesser included offenses evolved to accomplish a number of
different tasks. It provides notice to defendants of what crimes, not named in an
indictment or formal charge, may be prosecuted at trial. It offers prosecutors
930
See e.g.,, Evans v. Commissioner, T.C. Memo. 2010-199 (Although Evans'

conviction for subscribing a false Federal tax return does not collaterally estop him from denying
that he fraudulently understated petitioners' income tax liability, his conviction is evidence of
fraudulent intent).
931
United States v. Batchelder, 442 U.S. 114, 124 (1979).
- 396 -
flexibility in charging offenses by permitting them to add or substitute less serious

charges without suffering the cost and delay that would be occasioned by reindicting
or amending charging instruments. It bestows on defendants an opportunity to reduce
their liability to a more appropriate, less serious level. It recognizes the right of
jurors to be informed of related offenses that might apply. And it establishes limits
on multiple prosecutions and cumulative punishments.932
The lesser included offense concept thus does a lot of work, and sometimes is not a perfect fit in the
disparate contexts in which it is used, requiring some adjustments to fit the needs of the context.
It would be folly to attempt anything near definitive analysis or even offer a fair summary
of the application of the lesser included offense in all of the contexts in which it is deployed. I
therefore deal only with the more important contexts in a criminal tax practice. First, I deal with the
concept in the context of charging a greater offense where the same conduct could have been
charged as a lesser offense. At the close of the evidence, the prosecutor or the defendant may want
the jury to consider a lesser offense as a third alternative to the otherwise binary choice of guilt or
acquittal of the greater offense charged. The lesser included offense analysis is used to determine
whether that third alternative can be presented to the jury. Second, I deal with the concept of merger
where, if the jury convicts for two separate offenses which are substantially overlapping, the two
convictions merge into a single conviction. The lesser included offense analysis substantially
informs the merger question. Third, I deal with questions of double jeopardy where a defendant,
after a previous trial on a greater or lesser offense, is prosecuted for an offense that is a greater or
lesser offense arising from the same conduct. The lesser included offense analysis substantially
informs the double jeopardy question. Finally, I deal with joinder of offenses. The lesser included
analysis substantially informs that issue.
The name of the concept is fairly descriptive as to what the concept means. It identifies (i)
an offense that is (ii) lesser than some greater offense and (iii) included within the greater offense.
This is a good working description, although as we shall see there is some room for interpretation
in (ii) and (iii). The drill is to identify a lesser included offense and then ask the question as to the
contexts that are affected. And, because the contexts are different, the definition of the lesser
included offense may be adjusted for nuance.
B.
The Lesser Included Offense Charge - An Alternative to Guilt or

Acquittal.
1.
Introduction.
I first introduce the concept in the context it is perhaps most frequently encountered at the
close of a trial for a greater offense when one of the parties wants the jury to have a choice in
addition to guilt or acquittal. Why would either the prosecutor or the defendant want to present to
the jury this additional choice? This question is presented at the end of the trial before the case is
932
Michael H. Hoffheimer, The Rise and Fall of Lesser Included Offenses, 36 Rutgers
L. J. 351, 356 (2005).
- 397 -
submitted to the jury. The prosecutor may be concerned that he has not proved all elements of the
greater offense beyond a reasonable doubt or just that the jury may not be willing to convict for the
charged greater offense but, the prosecutor fears, will return a verdict of acquittal unless given a
lesser alternative. The defendant may assess the risks differently. The defendant may be concerned
that the jury would not convict of the greater offense if it has some way to avoid acquittal of any
crime but without a lesser offense alternative will convict of the greater offense rather than acquit.
The lesser included offense concept informs the trial judges decision as to whether to
present the lesser included offense to the jury as an option to guilty verdict or acquittal.
If the jury properly determines that one or more uncommon elements of the greater offense
were not proved beyond a reasonable doubt, but that all of the common elements were proved, a
conviction for the lesser included offense works just as the lesser included offense concept is
intended to work. It permits the jury to convict for the lesser offense because the lesser offense was
proved beyond a reasonable doubt. But, a fear often expressed with presenting to the jury an
alternative between conviction and acquittal is that it will permit a jury to compromise. Moreover,
even in a case where the jury believed the elements of the greater offense were proved, the jury may
think the law simply wrong and effectively nullify it in the case by returning a verdict of not guilty.
Offering the compromise verdict may effectively mitigate the benefits of occasional jury
nullification.933 And, perhaps the greatest concern a concern of constitutional dimensions arising
from a failure to give a lesser included offense choice to the jury where it is appropriate is that,
without that choice, the jury may to conviction where it is convinced that the defendant did
something seriously wrong and worth punishing but it is not convinced that he is guilty of the crime
charged.934
2.
Federal Rule.
FRCrP Rule 31. Verdict

****
(c) Lesser Offense or Attempt.
A defendant may be found guilty of any of the following:
933
On jury nullification and its relationship to the lesser included offense, see Jones v.
United States, 526 U.S. 227, 245 (U.S. 1999) discussing the common law background as follows:
The potential or inevitable severity of sentences was indirectly checked by juries'
assertions of a mitigating power when the circumstances of a prosecution pointed to
political abuse of the criminal process or endowed a criminal conviction with
particularly sanguinary consequences. This power to thwart Parliament and Crown
took the form not only of flat-out acquittals in the face of guilt but of what today we
would call verdicts of guilty to lesser included offenses, manifestations of what
Blackstone described as "pious perjury" on the jurors' part. 4 Blackstone 238-239.
934
In Schmuck v. United States, 489 U.S. 705 (1989), the Supreme Court discusses
concern about this phenomenon. Obviously, the extreme case for concern about this phenomenon
is a mandatory death penalty case where constitutional concerns may require the presentation of a
lesser included offense to give the jury an alternative. See Beck v. Alabama, 447 U.S. 625 (1980).
- 398 -
(1) an offense necessarily included in the offense charged;

(2) an attempt to commit the offense charged; or
(3) an attempt to commit an offense necessarily included in the offense
charged, if the attempt is an offense in its own right.
3.
Sansone and the Elements Test for Lesser Included Offense.

Sansone v. United States, 380 U.S. 343 (1965)
MR. JUSTICE GOLDBERG delivered the opinion of the Court.

Petitioner Sansone was indicted for willfully attempting to evade federal income taxes for
the year 1957 in violation of 7201 of the Internal Revenue Code of 1954. Section 7201 provides:
imposed by this title or the payment thereof shall, in addition to other penalties
provided by law, be guilty of a felony and, upon conviction thereof, shall be fined
not more than $10,000, or imprisoned not more than 5 years, or both, together with
the costs of prosecution.
The following facts were established at trial. In March 1956 petitioner and his wife
purchased a tract of land for $22,500 and simultaneously sold a portion of the tract for $20,000. In
August 1957 petitioner sold another portion of the tract for $27,000. He did not report the gain on
either the 1956 or 1957 sale in his income tax returns for those years. Petitioner conceded that the
1957 transaction was reportable and that, in not reporting it, he understated his tax liability for that
year by $2,456.48. He contended, however, that this understatement was not willful since he
believed at the time that extensive repairs on a creek adjoining a portion of the tract he retained
might be necessary and that the cost of these repairs might wipe out his profit on the 1957 sale.
To counter this defense, the Government introduced the following signed statement made
by petitioner during the Treasury investigation of his tax return:
I did not report the 1957 sale in our joint income tax return for 1957 because
I was burdened with a number of financial obligations and did not feel I could raise
the money to pay any tax due. It was my intention to report all sales in a future year
and pay the tax due. I knew that I should have reported the 1957 sale, but my wife
did not know that it should have been reported. It was not my intention to evade the
payment of our proper taxes and I intended to pay any additional taxes due when I
was financially able to do so.
At the conclusion of the trial, petitioner requested that the jury be instructed that it could
acquit him of the charged offense of willfully attempting to evade or defeat taxes in violation of
7201, but still convict him of either or both of the asserted lesser-included offenses of willfully filing
a fraudulent or false return, in violation of 7207, or willfully failing to pay his taxes at the time
required by law, in violation of 7203. Section 7201 is a felony providing for a maximum fine of
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$10,000 and imprisonment for five years. Both 7203 and 7207 are misdemeanors with maximum
prison sentences of one year under each section, and maximum fines of $10,000 under 7203 and
$1,000 under 7207.
The requested instructions were denied. Petitioner was found guilty by the jury of violating
7201, and was sentenced by the court to pay a fine of $2,000 and to serve 15 months
imprisonment. The conviction was upheld by the Court of Appeals. 334 F.2d 287. We granted
certiorari to consider the applicability of the lesser-included offense doctrine to these federal tax
statutes. 379 U.S. 886.
I.
We are faced with the threshold question as to whether or not 7207, which proscribes the
willful filing with a Treasury official of any known false or fraudulent return, applies to the filing
of an income tax return. If 7207 does not apply to income tax returns, it is obvious that the
defendant was not here entitled to a lesser-included offense charge based on that section.
[Holding that 7207 Applies Omitted]
II.
The basic principles controlling whether or not a lesser-included offense charge should be
given in a particular case have been settled by this Court. Rule 31 (c) of the Federal Rules of
Criminal Procedure provides, in relevant part, that the defendant may be found guilty of an offense
necessarily included in the offense charged. Thus, in a case where some of the elements of the
crime charged themselves constitute a lesser crime, the defendant, if the evidence justifie[s] it . . .
[is] entitled to an instruction which would permit a finding of guilt of the lesser offense. Berra v.
United States, supra, at 134. * * * *. But a lesser-offense charge is not proper where, on the evidence
presented, the factual issues to be resolved by the jury are the same as to both the lesser and greater
offenses. Berra v. United States, supra; * * * *. In other words, the lesser offense must be included
within but not, on the facts of the case, be completely encompassed by the greater. A
lesser-included offense instruction is only proper where the charged greater offense requires the jury
to find a disputed factual element which is not required for conviction of the lesser-included offense.
Berra v. United States, supra; * * * *. We now apply the principles declared in these cases to the
instant case.
III.
The offense here charged was a violation of 7201, which proscribes willfully attempting
in any manner to evade or defeat any tax imposed by the Internal Revenue Code. As this Court has
recognized, this felony provision is the capstone of a system of sanctions which singly or in
combination were calculated to induce prompt and forthright fulfillment of every duty under the
income tax law and to provide a penalty suitable to every degree of delinquency. Spies v. United
States, supra, at 497. As such a capstone, 7201 necessarily includes among its elements actions
which, if isolated from the others, constitute lesser offenses in this hierarchical system of sanctions.
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Therefore, if on the facts of a given case there are disputed issues of fact which would enable the
jury rationally to find that, although all the elements of 7201 have not been proved, all the
elements of one or more lesser offenses have been, it is clear that the defendant is entitled to a
lesser-included offense charge as to such lesser offenses. As has been held by this Court, the
elements of 7201 are willfulness; the existence of a tax deficiency, * * * and an affirmative act
constituting an evasion or attempted evasion of the tax, Spies v. United States, supra. In
comparison, 7203 makes it a misdemeanor willfully to fail to perform a number of specified acts
at the time required by law -- the one here relevant being the failure to pay a tax when due. This
misdemeanor requires only willfulness and the omission of the required act -- here the payment of
the tax when due. As recognized by this Court in Spies v. United States, supra, at 499, the
difference between a mere willful failure to pay a tax (or perform other enumerated actions) when
due under 7203 and a willful attempt to evade or defeat taxes under 7201 is that the latter felony
involves some willful commission in addition to the willful omissions that make up the list of
misdemeanors. Where there is, in a 7201 prosecution, a disputed issue of fact as to the existence
of the requisite affirmative commission in addition to the 7203 omission, a defendant would, of
course, be entitled to a lesser-included offense charge based on 7203. Cf. Spies v. United States,
supra. In this case, however, it is undisputed that petitioner filed a tax return and that the petitioners
filing of a false tax return constituted a sufficient affirmative commission to satisfy that requirement
of 7201. The only issue at trial was whether petitioners act was willful. Given this affirmative
commission and the conceded tax deficiency, if petitioners act was willful, that is, if the jury
believed, as it obviously did, that he knew that the capital gain on the sale of the property was
reportable in 1957, he was guilty of violating both 7201 and 7203. If his act was not willful, he
was not guilty of violating either 7201 or 7203. Thus on the facts of this case, 7201 and 7203
covered precisely the same ground. Berra v. United States, supra, at 134. This being so, on the
authorities cited, it is clear that petitioner was not entitled to a lesser-included offense charge based
on 7203. Section 7207 requires the willful filing of a document known to be false or fraudulent
in any material manner. The elements here involved are willfulness and the commission of the
prohibited act. Section 7207 does not, however, require that the act be done as an attempt to evade
or defeat taxes. Conduct could therefore violate 7207 without violating 7201 where the false
statement, though material, does not constitute an attempt to evade or defeat taxation because it does
not have the requisite effect of reducing the stated tax liability. This may be the case, for example,
where a taxpayer understates his gross receipts and he offsets this by also understating his deductible
expenses. In this example, if the Government in a 7201 case charged tax evasion on the grounds
that the defendant had understated his tax by understating his gross receipts, and the defendant
contended that this was not so, as the misstatement of gross receipts had been offset by an
understatement of deductible expenses, the defendant would be entitled to a lesser-included offense
charge based on 7207, there being this relevant disputed issue of fact. This would be so, for in
such a case, if the jury believed that an understatement of deductible expenses had offset the
understatement of gross receipts, while the defendant would have violated 7207 by willfully
making a material false and fraudulent statement on his return, he would not have violated 7201
as there would not have been the requisite 7201 element of a tax deficiency. Here, however, there
is no dispute that petitioners material misstatement resulted in a tax deficiency. Thus there is no
disputed issue of fact concerning the existence of an element required for conviction of 7201 but
not required for conviction of 7207. Given petitioners material misstatement which resulted in
a tax deficiency, if, as the jury obviously found, petitioners act was willful in the sense that he
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knew that he should have reported more income than he did for the year 1957, he was guilty of
violating both 7201 and 7207. If his action was not willful, he was guilty of violating neither.
As was true with 7203, on the facts of this case 7201 and 7207 covered precisely the same
ground, Berra v. United States, supra, at 134, and thus petitioner was not entitled to a
lesser-included offense charge based on 7207. Petitioner makes one final contention. He argues
that he could have been acquitted of attempting to evade or defeat his 1957 taxes, in violation of
7201, but still have been convicted for willfully failing to pay his tax when due in violation of
7203 or willfully filing a fraudulent return in violation of 7207, if the jury believed his statement
contained in the government-introduced affidavit, that, although he knew that profit on the sale in
question was reportable for 1957 and that tax was due thereon, he intended to report the sale and pay
the 1957 tax at some unspecified future date. The basic premise of this argument is that, although
all three sections require willfulness, on the facts here, the contents of these willfulness requirements
differ. The argument is made that while an intent to report and pay the tax in the future does not
vitiate the willfulness requirements of 7203 and 7207, it does constitute a defense to a willful
attempt in any manner to evade or defeat any tax imposed by the Internal Revenue Code, in
violation of 7201. While we agree that the intent to report the income and pay the tax sometime
in the future does not vitiate the willfulness required by 7203 and 7207, we cannot agree that it
vitiates the willfulness requirement of 7201. No defense to a 7201 evasion charge is made out
by showing that the defendant willfully and fraudulently understated his tax liability for the year
involved but intended to report the income and pay the tax at some later time. As this Court has
recognized, 7201 includes the offense of willfully attempting to evade or defeat the assessment
of a tax as well as the offense of willfully attempting to evade or defeat the payment of a tax. * *
* * The indictment here charged an attempt to evade income taxes by defeating the assessment for
1957. The fact that petitioner stated to a revenue agent that he intended to report his 1957 income
in some later year, even if taken at face value, would not detract from the criminality of his willful
act defeating the 1957 assessment. That crime was complete as soon as the false and fraudulent
understatement of taxes (assuming, of course, that there was in fact a deficiency) was filed. See
United States v. Beacon Brass Co., 344 U.S. 43, 46. See also Spies v. United States, supra, at
498-499.
In sum, it is clear here that there were no disputed issues of fact which would justify
instructing the jury that it could find that petitioner had committed all the elements of either or both
of the 7203 and 7207 misdemeanors without having committed a violation of the 7201 felony.
This being the case, the petitioner was not entitled to a lesser-included offense charge and the
judgment of the Court of Appeals is
Affirmed.
-----[END OF SANSONE CASE]------After Sansone, the Supreme Court held in Schmuck v. United States, 489 U.S. 705 (1989)
that an elements test controls the lesser included offense analysis. The Court held that the lesser
offense must be necessarily included in the greater offense for the lesser included offense instruction
to the jury. The Court explained:
- 402 -
Under this [elements] test, one offense is not "necessarily included" in

another unless the elements of the lesser offense are a subset of the elements of the
charged offense. Where the lesser offense requires an element not required for the
greater offense, no instruction is to be given under Rule 31(c).935
Stated otherwise, if all of the elements of the lesser offense are included in the elements of the
greater offense but the greater offense has some additional element that is not included in the lesser
offense, then the lesser offense is a lesser included offense; otherwise it is not.
Assume the following:
Offense 1, the greater offense - Elements A, B and C,
Offense 2, a lesser offense Elements B and C
Offense 3, a lesser offense Elements C and D
On a strict elements analysis, Offense 2 is a lesser included offense, and Offense 3 is not a lesser
included offense. The reasons: (i) Offense 1 has the same elements as Offense 2 except Offense 1
has an additional element that would permit the jury to find a defendant guilty of Offense 2 but not
Offense 1 by finding the absence of proof as to Element A; hence, Offense 2 is not does not describe
the same offense as Offense 1, but is a lesser included offense;936 and (ii) Offense 1 and 3 each have
an element that is not common to each other; hence, Offense 3 is not an offense necessarily included
in Offense 1.
This would be the end of the analysis if Courts were limited to a strict elements comparison.
Sansone suggests, however, a more nuanced analysis based upon a practical focus on the elements
935
Schmuck v. United States, 489 U.S. 705, 716 (1989). In Schmuck, the Court
discussed the constitutional dimensions of the requirement that the lesser included offense elements
be a subset of the greater offense because the defendant can only be charged for the crimes alleged
in the indictment. If the lesser offense has an element not in the greater one charged in the
indictment, that element will not have been alleged in the indictment and the defendant would not
have been on notice that he could be convicted of the lesser offense. That may be small comfort to
a defendant who actually would prefer that the jury be presented a lesser offense alternative than the
greater offense offered in the indictment.
936
Of course, the jury could find all of the elements of Offense 1 present, so that it could
convict for Offense 1, but that would mean that the defendant is also guilty of Offense 2. Could the
jury convict of both? The lesser included offense instruction is given where the lesser offense is not
charged but is given to the jury as an alternative choice. Thus, as presented to the jury, the jury will
usually be charged to first determine guilt or acquittal on the greater offense and, only if it
determines acquittal, to then consider the lesser offense. See Rutledge v. United States, 517 U.S.
292, 307 n. 16 (U.S. 1996) (citing the Seventh Circuit pattern jury instruction which, in this respect,
is like the Fifth Circuit pattern jury instruction above. If the indictment were to charge both the
greater and the lesser offense, the judge should present the same concept of guilt only as to one
(provided that the judge recognizes that the lesser offense is a lesser included offense and not a
separate offense.
- 403 -
that are in play at the conclusion of the evidence.937 As held in Sansone, if Element A of Offense
1 is not in issue at the close of the evidence, so that guilt or innocence of Offense 1 turns on
elements B and C which are common to Offense 2, then Offense 2 is not a lesser included offense.938
Similarly, a nuanced focus on Element D of Offense 3 might justify a conclusion that, on the facts
of the case at the close of the evidence and from a practical perspective, Element D is sufficiently
like Element B of Offense 1 that Offense 3 could be considered a lesser included offense.
Lets consider the elements test in a typical tax case. First, lets assume the Government has
charged the defendant with tax evasion, 7201, a five year felony. The defendant prefers acquittal
but, second best, would prefer conviction for fraudulent documents, 7207, a one year misdemeanor.
Each of these offenses has elements that are not included in the other. Section 7201 requires tax due
and owing whereas 7207 does not; similarly, 7207 requires a fraudulent document whereas
7201 does not. A strict elements comparison would therefore say that 7207 is not a lesser included
offense within 7201. But, the Schmuck Court read Sansone as holding that 7207 is a subset of
7201 and cited Sansone without hint of disagreement.939 Sansone held that, on the facts presented,
the tax due and owing element of 7201 was not in dispute, leaving in dispute only elements that
are common to 7201 and 7207, thus making 7207 a lesser offense describing the same conduct
rather than a lesser included offense. The Sansone Court did not deal directly with the uncommon
element of 7207 a fraudulent document perhaps because 7201 cases almost always involve
a fraudulent document, usually a fraudulent return. Hence, in the context presented, 7207's
element of a fraudulent document is subsumed in the elements of 7201. Section 7207 thus could
be a lesser included offense in this context to 7201 so long as 7201 had some uncommon element
937
Sansone was decided prior to Schmuck which adopted the elements test, but the
Supreme Court did cite Sansone without any suggestion that Sansone was inconsistent with the
elements test adopted in Schmuck. Sansone is still an elements test, but just focuses on the state of
play of the elements at the critical time that the determination has to be made at the close of trial
before submission to the jury. It is thus a practical elements test.
938
Sansone, p. 349-350 (But a lesser-offense charge is not proper where, on the
evidence presented, the factual issues to be resolved by the jury are the same as to both the lesser
and greater offenses; In other words, the lesser offense must be included within but not, on the
facts of the case, be completely encompassed by the greater.) (emphasis supplied). In Keeble v.
United States, 412 U.S. 205, 208 (1973), the Court state the test as being whether the evidence
would permit a jury rationally to find [the defendant] guilty of the lesser offense and acquit him of
the greater. See also, United States v. Kim, 884 F.2d 189, 195 (5th Cir. 1989) (where, as in Sansone,
the defendant requested lesser included offense instructions on 7203 and 7207, but the Court
held:
There was no basis for submission of these instructions, however, because the only
fact issue at trial concerned the element of willfulness, and this issue was common
to all three offenses. The three offenses "covered precisely the same ground" under
the evidence; if the Kims' act was willful, then they were guilty of all three offenses,
while if their act was not willful, they were guilty of none of the offenses.
939
See Schmuck v. United States, 489 U.S. 705, 720 n. 11 (1989) (citing Sansone as
analyzing the elements involved in 26 U. S. C. 7207, and finding that they are a subset of the
elements in 26 U. S. C. 7201. (Emphasis supplied.)
- 404 -
in play such as tax due and owing. When, however, tax due and owing is not in contest (as was
the case in Sansone), the elements of 7207 and 7201 are the same and thus 7207 is not a lesser
included offense.940 Where, as in many or most 7201 cases, tax due and owing is in play, then
7207 would be a lesser included offense and either party would have the right to insist that the 7207
offense be presented to the jury.
Second, lets address the question o 7206(1) is a lesser included offense to 7201. On a
strict elements test, it is not 7201 requires a tax due and owing and 7206(1) does not and
conversely 7206(1) requires a return under penalty of perjury and 7201 does not.941 But, imagine
the common evasion of assessment case the evasion was effected by a fraudulent return under
penalty of perjury, then 7206(1)s uncommon element blends into an element of 7201, resulting
in 7206(1)s elements being the same as 7201 except for 7201's tax due and owing element.
That makes 7206(1) a lesser included offense to 7201.942 I include materials from the CTM
940
See Michael H. Hoffheimer, The Rise and Fall of Lesser Included Offenses, 36
Rutgers L. J. 351, 360-361 (2005) (even when requested, there must be some factual dispute about
the element that differentiates the greater and lesser included offense in order for a party to be
entitled to such instruction. Federal courts have so held, [citing Schmuck v. United States, 489
U.S. 705, 716 n.8 (1989) (citing Keeble v. United States, 412 U.S. 205, 208 (1973))]. I think it may
be a difference in degree rather than in kind, but the Supreme Court has suggested that the rough
edges of a strict application of the elements test may be mitigated by statutory interpretation. See
Carter v. United States, 530 U.S. 255, 262-3 (2000).
I do not understand the logic of the analysis that would permit a court to ignore an element
of the greater offense that the Government must prove beyond a reasonable doubt even when the
defendant stands silent on the issue. The Sansone defendant may not have contested the uncommon
element (Element A in the example and tax due and owing in Sansone), but, in the absence of a
stipulation by the parties that Element A or tax due and owing exists, for the trial judge to determine
that that uncommon element is not in play is to usurp the function of the jury to find all of the
elements of the crime based on proof beyond a reasonable doubt. Sansone makes sense only if a
sentencing judge can determine that the jury cannot find that an uncommon element of the greater
offense is not present in effect directing a guilty verdict on that element at least for purposes of
applying the lesser included offense analysis. That is troublesome to me. The Government can
protect its right to lesser included offense by charging it ab initio and, at least in a 7201 case, a
defendant whose primary defense is willfulness (which is often the case in 7201 cases), might want
to take care to insure that the uncommon element (tax due and owing) is not actually or practically
conceded in order to preserver the opportunity to demand a lesser included offense charge to the
jury.
941
I discuss the Gricco case below (beginning on p. 410) where this difference in the two
offenses is noted in the merger context which also relies upon a lesser included offense analysis.
942
In a merger context, this practical application of the elements test of the lesser
included offense concept has been deployed to make 7206(1) a lesser included offense to 7201
so that a conviction for both offenses from the same conduct requires that the lesser offense (
7206(1)) be merged into the greater ( 7201). United States v. Dale, 301 U.S. App. D.C. 110, 991
F.2d 819, 858 (D.C. Cir. 1993) ([U]nder appropriate circumstances, lesser section 7206 offenses
merge with the 'capstone' prohibition of section 7201.); United States v. Helmsley, 941 F.2d 71,
- 405 -
stating DOJ Taxs analysis which may differ from some of the practical applications of the
element test that I have asserted in this section.
Finally, consistent with the conceptual basis for the lesser included analysis concept, federal
appellate courts appear to have uniformly concluded that HN7they may direct the entry of judgment
for a lesser included offense when a conviction for a greater offense is reversed on grounds that
affect only the greater offense.943
4.
Lesser Included Offense Charge.
The Fifth Circuits Pattern Jury Charge on the Lesser Included Offense is:
1.33 LESSER INCLUDED OFFENSE
We have just talked about what the government has to prove for you to
convict the defendant of [greater crime, e.g., committing a bank robbery in which
someone was exposed to risk of death by the use of a dangerous weapon]. Your first
task is to decide whether the government has proved, beyond a reasonable doubt, that
the defendant committed that crime. If your verdict on that is guilty, you are
finished. But if your verdict is not guilty, or if after all reasonable efforts, you are
unable to reach a verdict, you should go on to consider whether the defendant is
guilty of [lesser crime, e.g., simple bank robbery]. You should find the defendant
guilty of [lesser crime] if the government has proved, beyond a reasonable doubt,
that the defendant did everything we discussed before except that it did not prove
that the defendant [describe missing element, e.g., exposed someone to risk of death
by use of a dangerous weapon].
To put it another way, the defendant is guilty of [lesser crime] if the
following things are proved beyond a reasonable doubt: [List elements]. The
defendant is guilty of [greater crime] if it is proved beyond a reasonable doubt that
the defendant did all those things and, in addition [describe missing element]. If
your verdict is that the defendant is guilty of [greater crime], you need go no further.
But if your verdict on that crime is not guilty, or if after all reasonable efforts, you
are unable to reach a verdict on it, you should consider whether the defendant has
been proved guilty of [lesser crime].
99 (2d Cir. 1991) ("[W]here false returns 'were incidental step[s] in the consummation of the
completed offense of attempted defeat or evasion of tax and as such . . . constituted a crime within
[a] crime under the lesser included offense doctrine' then a conviction under Section 7206(1) for
filing those false returns merges into a conviction under Section 7201 for the inclusive fraud of tax
evasion.").
Still in other contexts, courts will view the elements more rigidly, holding that 7206(1) is
not a subset of 7201. E.g., United States v. Greene, 239 Fed. Appx. 431, 436-438 (10th Cir. 2007).
943
Rutledge v. United States, 517 U.S. 292, 306 (U.S. 1996) (also noting that Rutledge
did not offer the occasion now to consider the precise limits on the appellate courts' power to
substitute a conviction on a lesser offense for an erroneous conviction of a greater offense.
- 406 -
Of course, if the government has not proved beyond a reasonable doubt that
the defendant committed [lesser crime], your verdict must be not guilty of all of the
charges.
5.
Tax Division Policy.
The Tax Division Policy regarding lesser included offenses adopts the Schmuck strict
elements test.944 I quote the relevant portions of the CTM and ask that the reader consider whether
the CTM accurately construes Schmuck and Sansone:945
Section 7203. In cases charged as Spies-evasion (i.e., failure to file, failure to pay,
and an affirmative act of evasion) under section 7201, it is the governments position
that neither party is entitled to an instruction that willful failure to file (section 7203)
is a lesser included offense of which the defendant may be convicted.946 Thus, if
there is reason for concern that the jury may not return a guilty verdict on the section
7201 charges (for example, where the evidence of a tax deficiency is weak),
consideration should be given to including counts charging violations of both section
7201 and section 7203 in the indictment. It is important to note, however, that a
willful failure to pay is a lesser included offense of a willful attempt to evade the
payment of tax. United States v. McGill, 964 F.2d 222, 239-40 (3d Cir. 1992);
United States v. DeTar, 832 F.2d 1110, 1113-14 (9th Cir. 1987).
The issue whether cumulative punishment is appropriate where a defendant has been
convicted of violating both section 7201 and section 7203 generally will arise only
in pre-guidelines cases. Under the Sentencing Guidelines, related tax counts are
grouped, and the sentence is based on the total tax loss, not on the number of
statutory violations. Thus, only in those cases involving an extraordinary tax loss will
the sentencing court be required to consider an imprisonment term longer than five
years. In those cases in which cumulative punishments are possible and the defendant
has been convicted of violating both sections 7201 and 7203, the prosecutor may, at
his or her discretion, seek cumulative punishment. However, where the sole reason
for including both charges in the same indictment was a fear that there might be a
failure of proof on the tax deficiency element, cumulative punishments should not
be sought.947
944
CTM 8.11 (2008 ed.) (citing Schmuck v. United States, 489 U.S. 705, 709-10 (1989))
and referring to and incorporating Tax Division Memorandum, dated February 12, 1993 ).
945
Id.
946
I ask the reader to consider the question of whether such an all-inclusive statement
can be made.
947
I ask the reader consider whether the lesser included concept is not longer relevant.
It is true that, except in extraordinary tax loss circumstances, the guidelines range may not be
affected, but I would think that a judge may be persuaded under Booker that the Congressional
divide between a felony offense and a misdemeanor may make a 7203 conviction worthy of
distinction from a 7207 conviction. Perhaps more importantly, a felony conviction has
- 407 -
Section 7206. Similarly, in evasion cases where the filing of a false return (section
7206) is charged as one of the affirmative acts of evasion (or the only affirmative
act), it is now the Tax Divisions policy that a lesser included offense instruction is
not permissible, since evasion may be established without proof of the filing of a
false return. See Schmuck v. United States, 489 U.S. 705 (1989) (one offense is
necessarily included in another only when the statutory elements of the lesser offense
are a subset of the elements of the charged greater offense).948 Therefore, as with
Spies evasion cases, prosecutors should consider charging both offenses if there is
any chance that the tax deficiency element may not be proved but it still would be
possible for the jury to find that the defendant had violated section 7206(1). But
where a failure of proof on the tax deficiency element would also constitute a failure
of proof on the false return charge, nothing generally would be gained by charging
violations of both sections 7201 and 7206.
Where the imposition of cumulative sentences is possible, the prosecutor has the
discretion to seek cumulative punishments. But where the facts supporting the
statutory violations are duplicative (e.g., where the only affirmative act of evasion
is the filing of the false return), separate punishments for both offenses should not
be requested.
Section 7207. Although the elements of section 7207 do not readily appear to be a
subset of the elements of section 7201, the Supreme Court has held that a violation
of section 7207 is a lesser included offense of a violation of section 7201. See
Sansone v. United States, 380 U.S. 343, 352 (1965); Schmuck v. United States, 489
U.S. at 720, n.11. Accordingly, in an appropriate case, either party may request the
giving of a lesser included offense instruction based on section 7207 where the
defendant has been charged with attempted income tax evasion by the filing of a
false tax return or other document.
Other Offenses. In tax cases, questions concerning whether one offense is a lesser
included offense of another may not be limited to Title 26 violations, but may also
include violations under Title 18 (i.e., assertions that a Title 26 charge is a lesser
included violation of a Title 18 charge or vice-versa). The policy set out in this
memorandum will also govern any such situations -- that is, the strict elements test
of Schmuck v. United States, 489 U.S. 705, should be applied.
The CTM cautions that some circuit courts precedent may not be consistent with DOJ Tax policy,
but that it is imperative that the policy should be followed. Of course, the Government attorney
would advise the court of precedent inconsistent with the policy and take the lumps as they fall.
substantially worse collateral consequences than a misdemeanor conviction.

948
I again ask the reader to consider whether this is correct. I discussed this issue above.
- 408 -
6.
Strategies on Lesser Included Offense.
In Schmuck, the Supreme Court noted that the lesser included offense charge may be
requested by either the prosecution or defense.949 Although, in theory, the prosecution could have
included the lesser included offense in the original charging documents, it often will not. If, at the
close of trial, the prosecution feels some weakness as to an element of the charged greater offense
and the lesser included offense does not have that element, the prosecution may well want a lesser
included offense instruction rather than tilt the jury to an outright acquittal. On the other hand, as
the Supreme Court noted in Schmuck and subsequent cases, in a case where the jury is convinced
that the defendant did something wrong but has only the binary choice of guilt or acquittal on the
greater offense, it may be subtly and unconstitutionally tilted to a guilty verdict even where it may
doubt that the prosecution has proved all the elements beyond a reasonable doubt.950 For this reason,
of course, it is often the defendant who wants a lesser included offense charge.
The strategies of the lesser included offense doctrine are illustrated in McGill v. United
States, 964 F.2d 222 (3d Cir. 1992), cert. denied 113 S.Ct. 664 (1992). There, relying on Sansone,
the Government requested an instruction that 7203 willful failure to pay was a lesser included
offense to 7201 evasion of payment.951 The Court gave the lesser included offense instruction.
McGill objected on appeal, and the Court observed (p. 240):
McGill points out that, unlike this case, the defendants in Sansone and DeTar
requested a lesser-included charge. n32 This does not affect our conclusion. The
court may give a lesser-included offense instruction, if deemed appropriate, without
a request from either the defendant or the Government. 2 C. Wright, Federal Practice
and Procedure: Criminal 2d, 498 at 800 (2d ed. 1982).
n32 McGill did not request a lesser-included charge in this case, because he was
concerned that the jury might reach a compromise verdict on his tax and bribery
charges. Joint App. at A-2168. Ordinarily, the defendant insists upon a lesser offense
instruction, and it can be reversible error not to so instruct where, as here, the lesser
offense does not require extra proof.
What if the elements requirements are not met and the defendant still sees some advantage
in letting the jury know that the conduct in question is a crime, if at all, not as charged but for some
other offense which is not technically a lesser included offense? The prosecutor has made the
charging decision for the charged offense and may well not want the jury to know that his or her
imagination of the case does not match the charge actually made in the facts that will be presented.
There are strategies to put that other offense information before the jury if the defense feels it is a
good strategy, but further exploring this opportunity is beyond the scope of this text.952
949
Schmuck v. United States, 489 U.S. 705, 717 (1989).

See e.g., Beck v. Alabama, 447 U.S. 625 (1980) (death penalty case where there was
a viable lesser included offense that could have been but was not charged).
951
See CTM 8.11 (2008 ed.).
952
See Thomas Lundy, Jury Instruction Corner: Defense Theory Instruction On
Non-Included Lesser Offenses, 31 Champion 60 (2007).
950
- 409 -
7.
Sentencing Guidelines Considerations.
Because of the way the Sentencing Guidelines work, the actual Guidelines range may not
be affected by a conviction for the lesser included offense rather than the greater offense. I
previously noted that phenomenon with respect to the Governments choice in charging. Thus, for
example, a conviction for four counts of evasion will generate exactly the same sentencing range
as four counts of 7207, a misdemeanor, so long as the maximum on the sentencing range is 4 years
or less. And, logically, a sentencing judge would not consider the two convictions for essentially
the same conduct as warranting upward consideration in the sentencing range or Booker variance.
Hence, a defendant successfully obtaining a 7207 lesser included offense charge and conviction
on the lesser charge rather than the greater may not receive any sentencing benefit. There are still
important advantages to a misdemeanor conviction rather than an evasion conviction such as
making the Booker arguments for variance easier for a misdemeanor conviction and many of the
collateral consequences of conviction that apply to a felony conviction do not apply to a
misdemeanor conviction. I hope that readers by now will be able to mentally frame the type of
Booker argument for variance where the defendant has succeeded in obtaining conviction for the
7207 lesser included offense, but the enthusiasm for this potential sentencing benefit may be
mitigated somewhat by the possibility of the judge concluding that tax evasion was committed and
shape his view of the sentence based on tax evasion. Note in this regard, the relevant conduct
concept for sentencing where a sentencing judge is permitted to consider relevant conduct in
determining the tax loss; I would think the judge could do the same for other sentencing purposes
so long as the sentence does not exceed the sentence for the offense of conviction.
C.
Merger.
In the foregoing discussion of lesser included offense, if the court allows the jury to consider
a lesser included offense, it is in the context of either/or either the greater or the lesser offense.
What happens if, based on the same conduct, a jury found a defendant guilty of both the lesser and
the greater offense? In other words, what if the Government charges the lesser included offense
along with the greater offense. Can the defendant be convicted of both crimes and, if so, is that
appropriate?
In United States v. Gricco,953 the defendants were convicted of tax evasion ( 7201) and tax
perjury ( 7206(1)). Although the appellate decision is sparse on detail, it appears that they were
convicted of both on the same basic facts. At least the court assumed that phenomenon in
addressing the defendants argument on appeal that the convictions should have merged, with the
result that they should have been convicted only of one or the other. The defendants urged that the
sentences should have merged. The Court addressed the argument as follows:
In this case, the parties briefs focus primarily on the question whether the
district court committed any sort of error at all, and both sides advance reasonable
arguments relating to that question. Whether a defendant may be punished under
two separate statutory provisions for the same act or transaction depends on the
953
United States v. Gricco, 277 F.3d 339 (3d Cir. 2002).
- 410 -
intent of the lawmakers. See Ball v. United States, 470 U.S. 856, 861 (1985). It is
presumed, however, that punishment under both provisions was not intended if the
provisions proscribe the same offense, see, e.g., Rutledge v. United States, 517
U.S. 292, 297 (1996), and whether two provisions proscribe the same offense is
generally determined by applying the rule set out in Blockburger v. United States,
284 U.S. 299, 304 (1932), which asks whether each offense requires proof of an
element that the other does not. If each offense contains such an element, it is
presumed, subject to rebuttal, that multiple punishment is allowed. See Rutledge,
517 U.S. at 297; Blockburger, 284 U.S. at 304.
In the present case, the government argues that the offenses of tax evasion
(26 U.S.C. 7201) and making a false return (26 U.S.C. 7206(1)) each contain
an element that the other lacks. The offense of tax evasion requires proof of an
attempt to evade the payment of a tax that is due, whereas the offense of making a
false return does not require proof of this element: a taxpayer who makes a material
misstatement of fact on a return may be convicted under 26 U.S.C. 7206(1) even
if the taxpayer pays the full amount that is due. Similarly, the offense of making a
false return requires proof of a false statement on a return, whereas a violation of 26
U.S.C. 7201 may be shown even if the taxpayer did not file a return at all.
The defendants argue, however, that the Blockburger test merely raises a
presumption that Congress meant to permit punishment under both provisions, that
many other circuits have held that the offenses of tax evasion and making a false
return merge when they are based on the same act, and that the Supreme Court in
Sansone v. United States, 380 U.S. 343, 349 (1965), stated that the offense of filing
a false return, in violation of 26 U.S.C. 7203, may be a lesser included offense of
tax evasion in some circumstances.954
The Court in Gricco ultimately sidestepped the issue. The defendants had not raised the argument
at the trial level. The court thus held that it could consider the issue only if it affected substantial
rights. The error, if error at all, did not affect substantial rights because the convictions that would
have been upset were subject to concurrent sentencing, so that vacating the conviction would not
affect the sentencing. Nevertheless, other courts, including the Second Circuit in Helmsley, relying
on a practical lesser included offense analysis have held that convictions of both 7201 and
7206(1) can merge 955
954
277 F.3d at pp. 350- 351. Some case cites omitted for readability.
In United States v. Helmsley, 941 F.2d 71 (2d Cir. 1991), cert denied, 502 U.S. 1091
(1991), the indictment charged both 7201 and 7206(1) and the jury convicted the defendant of
both charges. The issue on appeal was whether the 7206(1) merged into the 7201 conviction
because it was a lesser included offense. The Court stated (p. 99):
We have held that where false returns were incidental step[s] in the consummation
of the completed offense of attempted defeat or evasion of tax and as such . . .
constituted a crime within [a] crime under the lesser included offense doctrine
then a conviction under Section 7206(1) for filing those false returns merges into a
955
- 411 -
The Blockburger test, noted by the Gricco court, states a test that is essentially the same as
the lesser included offense test.956
D.
Double Jeopardy.
A similar analysis is used in a double jeopardy context.

Two offenses are considered the "same offense" for double jeopardy purposes
unless each offense requires proof of a fact that the other does not. Blockburger v.
United States, 284 U.S. 299, 304 (1932). An acquittal on a greater or lesser included
offense, for example, bars prosecution on the other offense. Brown v. Ohio, 432
U.S. 161, 168 (1977).957
Here too, a practical approach to the elements analysis, such as applied in the lesser included offense
analysis may support the conclusion that different offenses with some uncommon elements can
invoke a double jeopardy holding.958
In considering this issue, consider the following: The defendant is charged with 7201
evasion for years 1 - 4. The defendant is convicted or acquitted (makes no difference for present
purposes). Does the double jeopardy prohibition prevent the Government from obtaining an
indictment for 7206(1) tax perjury for the same years? Despite the Governments claims about
the inapplicability of the lesser included offense concept, I doubt that any court would countenance
that double dip from the same pattern of conduct in the same years. And, I doubt that the
Government would ever press the issue in a second round indictment for the same years for the same
conduct,959 but the Government might claim that its declination to prosecute is an act of prosecutorial
discretion rather than a constitutional requirement based on the lesser included offense concept.
The lesser included offense concept can operate in the reverse as well to preclude a
subsequent trial for the greater offense. Assume, for example, a fact circumstance like Sansone in
which the defendant were first tried and either convicted or acquitted for the lesser 7207 offense.
Can the Government then obtain an indictment for the greater 7201 offense? No, at least if a
practical view of the 7207 jeopardy is taken. It is unlikely that this will occur in tax cases,
because the Government generally eschews charging misdemeanors (except in the case of failure
to file) and charging 7207 in particular.
conviction under Section 7201 for the inclusive fraud of tax evasion. * * * *.
956
See Rutledge v. United States, 517 U.S. 292, 297 (1996).
957
Dowling v. United States, 493 U.S. 342, 355 (1990).
958
United States v. Felix, 503 U.S. 378 (1992).
959
The Government usually investigates tax cases in considerable detail and is aware
of the possible charges it can bring. And, it will usually bring the greater offense charge(s) rather
than the lesser.
- 412 -
E.
Joinder.
We have seen above that the prosecution has some discretion as to the offense(s) it may
charge with regard to a pattern of conduct. A related issue is what other charges may the
Government make and try in the same trial. And related to that issue is whether the Government
may join other defendants. These are usually referred to as joinder issues. I `introduce the key
joinder themes that are presented in tax prosecutions.
Rule 8, FRCrP is:
Rule 8. Joinder of Offenses or Defendants
(a) Joinder of Offenses. The indictment or information may charge a
defendant in separate counts with 2 or more offenses if the offenses charged
whether felonies or misdemeanors or both are of the same or similar
character, or are based on the same act or transaction, or are connected with
or constitute parts of a common scheme or plan.
(b) Joinder of Defendants. The indictment or information may charge 2 or
more defendants if they are alleged to have participated in the same act or
transaction, or in the same series of acts or transactions, constituting an
offense or offenses. The defendants may be charged in one or more counts
together or separately. All defendants need not be charged in each count.
Joinder of counts and some of the issues presented may be illustrated as follows:
an indictment charging a taxpayer tax evasion or failure to file for three years, each
of which year would be a separate count. Under Rule 8(a), this would easily pass
muster.
an indictment charging two persons with one count of conspiracy as one count and
several counts of tax evasion with respect to their own tax returns which evasion was
an object of the conspiracy.960 Under Rule 8(a), the joinder of the counts would be
proper because the counts are related, and under Rule 8(b), the joinder of the persons
would be proper because the conduct is related
an indictment charging (i) ten persons with one count of conspiracy to evade third
parties taxes, (ii) twenty counts of evasion of those third parties taxes, and (iii)
three counts of evasion with respect to the tax liability of one of the ten persons but
that evasion was not within the scope of the conspiracy. This is the type of
indictment in the mother of all criminal tax cases United States v. Stein, et al, Dkt
05 Cr. 888 (LAK) (SDNY) involving KPMG related tax shelter activity. Under
this type indictment, certainly the defendants and the counts in items (i) and (ii)
could be joined under Rule 8. May the third?
960
This describes the indictment in United States v. Stein, et al, Dkt 05 Cr. 888 (LAK)
(SDNY), said to be the largest criminal tax case ever.
- 413 -
The issues and concerns are addressed in United States v. Shellef, 507 F.3d 82 (2d Cir.
2007). In Shellef, an excise tax was imposed on a certain chemical formulation that depleted the
ozone layer. The tax served as a disincentive for manufacture of the chemical. Certain sales were
exempted if for resale abroad. The exemption system was implemented by the manufacturer and
purchases being registered with the IRS and by the purchaser certifying under oath to the
manufacturer that the sales qualified for the exemption. The principal defendant, Shellef, had
engaged as early as 1995 in giving false certificates and selling the chemical into the U.S. market
free of the tax. After 1996, he allegedly joined with the other co-defendant in a conspiracy to do so.
As a result of the false certifications, the manufacturers involved either did not pay the tax or had
the tax refunded or credited. The defendants were charged in Count One with conspiracy and 46
counts of wire fraud related to the false certifications and resulting underpayment of tax. The
remaining counts related only to Shellef and were in two categories: 36 money laundering counts
and 3 tax crimes counts. Shellefs tax crimes counts were: one count of 7206(1) for a Shellef
corporations false corporate return for 1996, one count of 7201 (evasion) for Shellefs personal
return in 1996, and one count of 7206(1) for Shellefs personal return for 1999. Over the
defendants objection, the trial court permitted all of the counts to be joined and tried in a single
case. The defendants raised the issue of improper joinder on appeal.
The Court of Appeals said that it would
apply a common-sense rule to decide whether, in light of the factual overlap
among charges, joint proceedings would produce sufficient efficiencies such that
joinder is proper notwithstanding the possibility of prejudice to either or both of the
defendants resulting from the joinder.
Tax counts may be joined with non-tax counts where it is shown that the tax
offenses arose directly from the other offenses charged. The most direct link possible
between non-tax crimes and tax fraud is that funds derived from non-tax violations
either are or produce the unreported income. Thus, if a defendant is charged with
fraud, the government may prosecute the defendant for fraud and for not paying taxes
on the profits produced by the alleged fraud jointly. And if the character of the funds
derived do not convince us of the benefit of joining these two schemes in one
indictment, other overlapping facts or issues may.961
The Court reasoned that the tax counts (1996 and 1999) in the indictment could have been
joined properly with each other. And, based on the facts, the 1999 tax count might even have been
joined with the conspiracy, wire fraud and money laundering counts since the conduct related to the
latter allegedly produced the income giving rise to the tax on the 1999 tax count. But, the 1996 tax
counts should not have been joined with the conspiracy, wire fraud and money laundering counts
since the conduct underlying the conspiracy and wire fraud counts had not even commenced until
after 1996, it was not even clear on the record that the income giving rise to the 1996 counts arose
principally from the falsely certified sales before the conspiracy commenced, and a mere link to the
961
Id. at p. 98 (citations and internal quotations omitted).
- 414 -
subsequent sales through the use of proceeds generated in 1996 would not give sufficient linkage
to the 1996 returns forming the basis of the 1996 counts.
The charges are thus not based on the same act or transaction, and are not
connected with and do not constitute parts of a common scheme or plan under Rule
8(a). Although the 1996 Tax Counts may be relevant to determining whether
Shellef possessed the requisite mens rea for the 1999 Tax Count, the 1996 Tax
Counts and the non-tax counts are not sufficiently unified by some substantial
identity of facts or participants, nor do they arise out of a common plan or scheme.
We do not think, then, that the 1999 Tax Count -- which might have been
joined with either the 1996 Tax Counts or the conspiracy, wire fraud, and money
laundering counts -- provides an adequate link between the 1996 Tax Counts and the
non-tax counts to justify joinder of all the charges against Shellef. The 1996 Tax
Counts therefore should not have been joined with the remaining counts.962
962
Id. at p. 100 (citations and internal quotations omitted.)
- 415 -
CH. 4 - OTHER CONSEQUENCES.

I.
Forfeiture.
A.
Introduction to Forfeiture and its Role in the Federal Tax Crimes

Universe.
Congress has provided forfeiture for some of the crimes considered here (principally money
laundering and currency transaction reporting). Forfeiture law is a separate subject in itself, and I
can do little more here than to introduce the subject.963
There are two types of forfeiture one criminal, also referred to as in personam, and the
other civil, referred to as in rem.
In rem forfeiture is a civil action against a thing.964 In its historical conception, society finds
the thing offensive and therefore allows a civil action by the sovereign to forfeit the thing. Similarly,
historically, forfeiture of the thing is not punishment and not subject to the Excessive Fines Clause.
Illegal drugs is a good example. The owner of such drugs (if he or she will admit to being the
owner) has no claim for the seizure and forfeiture of illegal drugs. This perhaps make sense where
the property is contraband illegal to possess or own. Full bore forfeiture where the property is not
contraband and is legal to own, for example, being forfeitable only because used as an
instrumentality of a crime, forfeiture becomes suspect if the owner is innocent or, even if innocent,
the forfeiture punitively excessive. This historical conception of the in rem forfeiture has been
mitigated certain cases for example, allowing relief for an innocent owner. I discuss these
mitigations below.
In personam forfeiture is an adjunct of criminal action against a person. In personam
forfeiture is imposed in addition to the criminal penalties otherwise provided by statute. At common
law, under the concept of attainder, the felon forfeited all property to the crown and, in some case,
to his lord (his temporal lord). This type of full forfeiture against the felon is forbidden by the Art.
I, 9 , cl. 3 of the Constitution which prohibits bills of attainder.
In terms of mainstream federal tax crimes, forfeiture does not play a prominent role. As
noted in a recent conference.
963
For your further education on this subject, you might refer to a recently published
book, Levy, License to Steal: The Forfeiture of Property (Chapel Hill: The University of North
Carolina Press. 1996), the title of which should give you an idea of the authors view of the subject.
Another good discussion focusing on tax and money laundering is in Comisky, Feld and Harris, Tax
Fraud and Evasion: Money Laundering, Asset Forfeitures, Sentencing (Warren Gorham & Lamont
1994, with current supplement), upon which I have relied heavily in summarizing the materials
below.
964
See IRM 9.7.2.1 Overview (07-25-2007). The in rem forfeiture is brought under
FRCP Rule G.
- 416 -
Daniel Levy, assistant U.S. attorney for the Southern District of New York, speaking
on his own behalf, said that in most tax cases, prosecutors do not use forfeiture as
part of their arsenal. Forfeiture is used more in unique situations that involve
removing the proceeds of a fraud, such as with tax shelter promoters, he said, noting
that forfeiture deprives promoters of ill-gotten gains. "It is the exceptional tax case
where forfeiture is a part of the case," he said.965
B.
General Federal Forfeiture Rules.

1.
Introduction.
In 1970, in Congress first forays into the war on crimes, Congress enacted criminal
forfeiture first for RICO and then in the continuing criminal enterprises. Thereafter, in 1986,
Congress enacted forfeiture for the money laundering crimes. Although there are forfeiture rules
scattered through the various Codes and statutes (Comisky, Feld and Harris note that there are over
140 forfeiture statutes), the general forfeiture rules are set forth in 18 U.S.C., Part I, Ch. 46 ( 981
ff.).
Two types of forfeiture most relevant to this class are allowed -- civil forfeiture under 981
and criminal forfeiture under 982, both in 18 U.S.C. Civil forfeiture is the in rem type of forfeiture
noted above. It is separate from and not dependent upon any criminal prosecution. Criminal
forfeiture is the in personam type of forfeiture noted above and is an adjunct of a criminal
proceeding where the forfeiture is imposed at the time of sentencing.
2.
Civil forfeiture.
Contraband, being property illegal to own per se, is forfeitable even without the statute. The
statutes deal principally with property used in the commission of crime or proceeds from the
commission of crime and are in rem forfeitures.966 In part pertinent to this class, civil forfeiture is
available for property involved in a money laundering transaction under 1956 or 1957.967 And,
in pertinent part, proceeds from the commission of certain crimes, including specifically crimes
defined as specified unlawful activity in 1956(c)(7) are forfeitable.968 Civil forfeiture is not
prescribed in these general provisions for tax offenses. (Note that the Internal Revenue Code
provides certain forfeitures, which I cover below.) The statute confers title in the United States from
the time of commission of the underlying offense.969
965
Jeremiah Coder, ABA Meeting: DOJ Working on Formal Forfeiture Policy, 2012
TNT 181-6 (9/18/12).
966
IRM 9.7.2.3 Civilly Forfeitable Property (07-25-2007).
967
981(a)(1)(A).
968
981(a)(1)(C).
969
981(f).
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Seizures generally require a court seizure warrant obtained in a manner similar to a search
warrant, but there are some key exceptions.970 Upon satisfaction of this initial requirement, the
Attorney General generally makes the seizure, but in part pertinent to this class, the Secretary of the
Treasury makes the seizure for crimes investigated by Treasury (including, of course, the IRS).971
As usual in such a large bureaucracy, the Secretary of the Treasury has delegated the authority and
through redelegations the authority resides in local IRS management.972 The property, once seized,
is not repleviable.973 The Government may bring a judicial proceeding for forfeiture but in most
cases may also forfeit administratively, subject to the property owners right to invoke judicial
remedies by following certain requirements.974 Under the IRS administrative forfeiture procedures,
the IRS will notify all known claimants to the property that it intends to forfeit the property and will
advise those persons that they have either a judicial remedy or an administrative remedy. The
judicial remedy is obtained by filing a claim of ownership. The Governments right to make the
seizure and forfeit the property are contestable under the new procedures in 983 discussed below.
The civil forfeiture proceeding may be stayed if discovery in the proceeding might prejudice the
Governments investigation or the taxpayers rights.975
The civil forfeiture provisions were substantially revised by the Civil Asset Forfeiture
Reform Act of 2000" (CAFRA).976 In summary and in part relevant to this course, the following
are key features of civil forfeiture under the CAFRA under 983:
1.
General rules for forfeiture proceedings are provided to permit timely independent
judicial review of the Governments assertion of its right to forfeit.977 One of the most prominent
reforms is that the putative property owner does not have to post a bond to obtain judicial review
of the Governments right to forfeit.
970
981(b)(2).
981(b)(1).
972
See generally IRM 9.7, titled Asset Seizure and Forfeiture and see specifically IRM
9.7.2.2 for delegations to the IRS with respect to Bank Secrecy Act and Money Laundering seizures
and forfeitures.
973
981(c).
974
981(d) (incorporating Customs procedures under 19 U.S.C. 1602 et seq.); see IRM
9.7.3.6.1 (stating that administrative forfeiture is preferred unless the nature of the property requires
civil judicial forfeiture or prosecutorial considerations favor criminal judicial forfeiture).
975
981(g).
976
P. L. 106-185, 114 Stat. 202.
977
983(a). Prompt judicial review is a due process requirement (United States v.
Melrose East Subdivision, et al., 357 F.3d 493, 499 (5th Cir. 2004)), similar to the due process
requirements for jeopardy and termination assessments in tax cases (See Commissioner v. Shapiro,
424 U.S. 614 (1976), giving rise to the elaborate procedures for judicial review in 6861 ff.). In
Melrose East, the Fifth Circuit addressed the issue of the level of proof required to continue
preliminary restraint on the assets when they allegedly hinder the persons ability to engage counsel
which is related to the Supreme Courts holdings in Caplin & Drysdale, Chartered v. United States,
491 U.S. 617 (1989) (which I discuss later in this chapter) and its companion case, United States v.
Monsanto, 491 U.S. 600 (1989).
971
- 418 -
2.
Indigent property owners may obtain representation if they have indigent
representation in a related federal criminal case. Further, indigent property owners may obtain
representation if the Government seeks to forfeit a primary residence.978
3.
The Government must prove by a preponderance of the evidence that it is entitled to
make the forfeiture.979 If the Governments grounds for forfeiture is that the property facilitated the
commission of the offense, the Government must prove that there is a substantial connection
between the property and the offense.980 This allocation of the burden of proof is a substantial
departure from the prior rules which permitted seizure for forfeiture merely upon a showing of
probable cause and, after seizure, the claimant for property had the burden of showing by a
preponderance of the evidence that forfeiture is either unjustified or inappropriate.981
4.
excessive.982
A claimant may petition to determine whether the forfeiture was constitutionally
5.
Innocent owners of property, including bona fide purchasers, who did not participate
in the criminal offense or know of the conduct may avoid forfeiture.983
6.
Administrative forfeitures that have not been properly noticed may be set aside.984
7.
Expedited release from forfeitures may be granted in cases of hardship. 985
8.
These forfeiture protections apply generally to forfeitures under any applicable
federal law except in specifically enumerated circumstances, one of which is forfeitures under the
978
983(b).
983(c)(1).
980
983(c)(3).
981
IRM 9.7.3.4.4.
982
983(g)(1). The procedure has been described in United States v. Ferro, 681 F.3d
1105, ___ (9th Cir. 2012) as tracking the proportionately analysis of Bajakajian, with the following
procedures:
CAFRA states that a claimant "may petition the court to determine whether the
forfeiture was constitutionally excessive." 18 U.S.C. 983(g)(1). When a claimant
makes such a petition, a court should compare the forfeiture to the "gravity of the
offense," and the claimant then has the burden of establishing the forfeiture is
"grossly disproportional" to the offense. 18 U.S.C. 983(g)(2)-(3). Then, if the court
finds, by a preponderance of the evidence, that the forfeiture is "grossly
disproportional to the offense," it must "reduce or eliminate the forfeiture as
necessary to avoid a violation of the Excessive Fines Clause of the Eighth
Amendment of the Constitution." Id. at 983(g)(3)-(4).
983
983(d). See United States v. Ferro, 681 F.3d 1105 (9th Cir. 2012), for an analysis
of the innocent owner defense.
984
983(e).
985
983(f).
979
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Internal Revenue Code forfeitures (which I discuss below).986 As I note below, since forfeitures
under the Internal Revenue Code are not material for general crimes that we consider in this course,
this exception is also not material for this course.
Judicial proceedings related to civil forfeiture are handled under the Federal Rules of Civil
Procedure.
An additional constitutional issue is whether civil in rem forfeiture after conviction of the
crime constitutes punishment for purposes of the double jeopardy guarantee. The Supreme Court
has held that it does not.987
Finally, although historically in rem forfeiture was not subject to constitutional Excessive
Fines analysis, courts now recognize that it may be if the forfeiture is punitive and thus a fine for
conduct.988
3.
Criminal Forfeiture.
The principal criminal forfeiture statute is 982.989 Criminal forfeitures are in personam
forfeitures limited to the property of the defendant.990 The court in imposing sentence after
conviction may provide for forfeiture of property used in certain offenses, including the money
laundering offenses, and traceable proceeds of certain crimes. The indictment or information must
allege and there must be a special verdict (or provision of the guilty plea) as to the extent of the
defendants interest in the property.991 The Government may seek a post-indictment restraining
order to freeze funds that the indictment alleges are forfeitable.992 Where the property cannot be
located after the exercise of due diligence, substitute property owned by the defendant may be
986
983(i).
United States v. Ursery, 518 U.S. 267 (1996).
988
United States v. Bajakajian, 524 U.S. 321, 330-331 (1998) (noting that modern civil
in rem forfeiture laws were not aligned with the historical position, so that the in rem forfeitures
could be fines subject to Excessive Fines analysis; and noting that it does not follow that all modern
civil in rem forfeitures are nonpunitive and thus beyond the coverage of the Excessive Fines Clause
. . . . [A] modern statutory forfeiture is a 'fine' for Eighth Amendment purposes if it constitutes
punishment even in part. . . .
989
Other criminal forfeiture provisions are found elsewhere. See e.g., 18 U.S.C.
1963(a) (criminal forfeitures for racketeering); and 21 U.S.C. 853(a) (criminal forfeitures for drug
crimes).
990
IRM 9.7.3.
991
FRCrP Rule 7(c)(2) & 31(e).
992
In United States v. Daugerdas, 2012 U.S. Dist. LEXIS 167631 (SD NY 2012), that
restraining order was used to assure the integrity of the funds ultimately forfeitable. Daugerdas
moved to have the funds released in order to pay counsel. The district court refused. The
Constitution does not guarantee a defendant the right to use forfeitable assets to pay legal fees
citing United States v. Monsanto, 491 U.S. 600, 614 (1989).
987
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forfeited in its stead. 993 Although an adjunct of a criminal proceeding, the Government need prove
its right to forfeit only by a preponderance of the evidence.994
The following is a helpful introduction to criminal forfeiture, from a recent fraudulent
tax shelter prosecution where the defendants funds were seized prior to conviction,
thereafter his conviction was overturned, and he was awaiting retrial:
The forfeiture allegations in the S3 Indictment are governed by 21 U.S.C.
853, which provides that a criminal defendant convicted of mail or wire fraud
charges affecting a financial institution "shall forfeit ... any property constituting, or
derived from, any proceeds the person obtained, directly or indirectly, as the result
of such violation." See 18 U.S.C. 982(b)(1) (providing that forfeiture and seizures
under section 982 are governed by 21 U.S.C. 853); 18 U.S.C. 982(a)(2)(A)
(mandating forfeiture for mail or wire fraud charges affecting a financial institution).
The Government may properly seize assets pretrial that are forfeitable upon
conviction after demonstrating probable cause. See 21 U.S.C. 853(e)(1)-(2).
Proceeds are property that a person would not have but for the criminal offense.
Criminal forfeiture is designed to be punitive and its scope is broad. Thus,
coconspirators are liable jointly and severally to forfeit the reasonably foreseeable
proceeds of their criminal activity. A defendant convicted of an ongoing scheme is
also liable for the proceeds of the entire scheme. And assets that are otherwise
legitimate or untainted may nonetheless be seized if a criminal defendant would not
have acquired or maintained them but for his fraudulent scheme.
The S3 Indictment alleges that Daugerdas was the architect of a sophisticated
tax shelter fraud scheme that netted him more than $95 million. Similarly, the proof
at trial established that all of the tax shelter fee income was the product of this
scheme and that the entirety of the tax shelter fees obtained by the Chicago office of
Jenkins & Gilchrist were generated through the criminal acts of Daugerdas and his
coconspirators. As a result, none of these funds would have been obtained but for the
993
853(p). Criminal forfeiture overrides other rules that otherwise may limit
alienability. It is not clear to me whether ERISAs Anti-Alienation provision is exempt from
forfeiture enforcement. One court recently so held, but noted that other remedies to effectively seize
distributions (e.g., by garnishment) might be permitted for restitution. United States v. Hermann,
2012 U.S. Dist. LEXIS 166523 (ED VA 2012). Other courts have suggested that restitution
overrides the ERISAs Anti-Alienation prohibition. There are two key limits. As noted in Hermann,
garnishment of ERISA plan payments may be permissible. See United States v. Cunningham, 866
F. Supp. 2d 1050 (SD IA 2012) (citing cases). I have not researched this, so I just call it to readers
attention. I do note, however, that not all tax-favored retirement plans are subject to the AntiAlienation provision; for example IRAs are not, and therefore are subject to forfeiture. United States
v. Vondette, 352 F.3d 772 (2d Cir. 2003).
994
982(a)(1).
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fraudulent scheme, and they are subject to seizure as "proceeds" of the fraudulent
scheme.
The Government's evidence at trial consisted of forty-one witnesses and
approximately 1,300 exhibits. The proof of the fraudulent tax shelter schemeand
Daugerdas' criminal involvementwas overwhelming. A Monsanto hearing would
require this Court to weigh the same evidence under the less demanding burden of
probable cause. And it would not alter this Court's earlier conclusion that the funds
seized by the Government are properly forfeitable as "proceeds."995
In United States v. Bajakajian, 524 U.S. 321 (1998), the Supreme Court held that criminal
forfeiture is subject to the Constitutions prohibition against Excessive Fines and further held that
the forfeiture under consideration there violated that Constitutional guarantee. In that case, a citizen
with a mid-eastern background attempted to leave the United States with a large sum of cash
($356,144). The cash was not derived from a criminal enterprise, or at least so the Court assumed,
and was being transported to repay a legitimate debt. The mid-eastern background perhaps gave the
citizen a cultural disposition to secrecy regarding financial affairs. The citizen failed to disclose on
the CMIR (Cash and Monetary Instrument Report) that must be filled out in exiting the United
States that he was transporting the cash. Using cash-sniffing dogs, Customs discovered the cash
and inquired of the citizen, whereupon the citizen told a falsehood about the cash. The citizen was
then arrested and indicted for (1) failing to report the cash as required pursuant to 31 U.S.C.
5316(a)(1), (2) making false statements to customs under 18 U.S.C., 1001 and (3) forfeiture of the
$357,144 pursuant to 18 U.S.C. 982(a)(1) (the criminal forfeiture provision). (Note that the
Government could not have asserted civil forfeiture because the money was not criminally derived.)
The district court held that the requested forfeiture violated the Excessive Fines guarantee and
limited the forfeiture to $15,000. The Supreme Court agreed.
The Court started its analysis as follows:
The touchstone of the constitutional inquiry under the Excessive Fines Clause
is the principle of proportionality: The amount of the forfeiture must bear some
relationship to the gravity of the offense that it is designed to punish. * * * *. Until
today, however, we have not articulated a standard for determining whether a
punitive forfeiture is constitutionally excessive. We now hold that a punitive
forfeiture violates the Excessive Fines Clause if it is grossly disproportional to the
gravity of a defendants offense.
First, the Court discussed the critical distinction between civil in rem forfeiture and criminal
forfeiture. Second, the court concluded that the Section 982 forfeiture was criminal in personam
forfeiture. Third, the Court held that the Excessive Fines prohibition required that the punishment
be proportional to the gravity of the offense. Here, the offense for which the forfeiture was sought
was solely the failure to fill out the CMIR properly. The offense of lying to Government agents
995
United States v. Daugerdas, 2012 U.S. Dist. LEXIS 167631 (SD NY 2012) (some
case citations, quotations and record citations omitted).
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under 18 U.S.C. 1001 was not the basis for the forfeiture. Relative to the crime of failure to fill
out the CMIR properly, a 100% forfeiture was disproportional. In this regard, the Court noted that
the cash was not the instrumentality of a crime, such as a pistol or drugs.
As the dissent notes, the Courts holding only applies to criminal forfeitures. Civil
forfeitures are not subject to the Excessive Fines prohibition; civil forfeiture statutes frequently
provide for full forfeiture. See e.g., 18 U.S.C. 981 imposing civil forfeiture for property involved
in a transaction or attempted transaction in violation of 1956 and 1957, the money laundering
provisions. Hence, as the dissent cautions, the wave of the future is to provide for civil forfeitures
as a substitute for criminal forfeitures. Subsequently, CAFRA was amended to provide in the case
of civil forfeiture that proportionality will apply, thus resolving for the present this potential
overreaching in the civil forfeiture provisions.996
Bajakajians Excessive Fines analysis does not apply to forfeiture of proceeds of criminal
activity. Forfeiture of proceeds simply parts the owner from the fruits of the criminal activity.997
Obviously, a person who embezzles $1,000 is subject to forfeiture of the proceeds embezzled
(setting aside for a moment the victims claim on the embezzled funds). But what if the embezzler
takes the $1,000 and invests it in the lottery and wins $25,000,000? What amount is or should be
subject to forfeiture?998
C.
Internal Revenue Code Forfeiture.

1.
The Statutes.
The Internal Revenue Code provides forfeiture in two situations.

The first, quite limited forfeiture provision is for property subject to a tax imposed by Title
26 (Internal Revenue Code) upon which tax is evaded.999 This first class of forfeiture applies to the
taxed property itself and to related property (raw materials, equipment, packages, and the like).
This is a limited provision in terms of this type of class because the federal taxes most frequently
encountered in a criminal tax practice are not this type of property tax.
The second is potentially far more sweeping. The Code provides:
Sec. 7302. Property used in violation of internal revenue laws
It shall be unlawful to have or possess any property intended for use in
violating the provisions of the internal revenue laws, or regulations prescribed under
such laws, or which has been so used, and no property rights shall exist in any such
996
983(g).
United States v. Alexander, 32 F.3d 1231, 1236 (8th Cir. 1994).
998
In United States v. Betancourt, 422 F.3d 240 (5th Cir. 2005), the defendant purchased
lottery tickets with the proceeds of drug trafficking and won. Upon conviction, the Court forfeited
the available proceeds of the lottery.
999
7301.
997
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property. A search warrant may issue as provided in chapter 205 of title 18 of the
United States Code and the Federal Rules of Criminal Procedure for the seizure of
such property. Nothing in this section shall in any manner limit or affect any
criminal or forfeiture provision of the internal revenue laws, or of any other law. The
seizure and forfeiture of any property under the provisions of this section and the
disposition of such property subsequent to seizure and forfeiture, or the disposition
of the proceeds from the sale of such property, shall be in accordance with existing
laws or those hereafter in existence relating to seizures, forfeitures, and disposition
of property or proceeds, for violation of the internal revenue laws.
Keep in mind that, as discussed earlier, the Secretary of the Treasury (and by delegation the IRS)
has authority over forfeitures related to crimes other than crimes described in the Internal Revenue
Code.
2.
IRC Forfeiture Generally.
Forfeiture plays virtually no role in criminal tax prosecutions for substantive tax crimes.
Forfeiture plays a big role in money laundering crimes and the crimes that underlie money
laundering (drug trafficking, etc.). Because this case book is principally devoted to tax crimes, I
here focus only on the forfeitures related to tax crimes and specifically on the Internal Revenue Code
provisions noted above. I discuss general forfeitures as they relate to attorneys fees because of its
importance to the practitioner.
3.
Proceeds and Tracing.
7302 does not permit proceeds forfeiture or tracing. The IRS takes the position that 7302
forfeiture is permitted for violations of the IRS currency reporting rules in 6050I, but only the
actual funds could be seized in any event and fungibility issues may make it impractical.1000
4.
Types of Assets.
In United States v. One 1954 Rolls Royce Silver Dawn, 777 F.3d 1358 (9th Cir. 1985), a
tax shelter promoter peddled his product with backdated documents. The forfeiture was based on
use of the automobile in the scheme, and the Court approved the forfeiture. Section 7302 is used
in motor fuel excise tax cases to permit the IRS to seize trucks, vessels and goods involved in the
scheme to evade.
The IRS also takes the position that computers and equipment used in false refund schemes
are subject to 7302 forfeiture. Forfeiture may also apply to books, records, ledgers and papers,
but these are generally of limited value to the IRS and thus not worth forfeiting.
For most tax crimes (setting aside the nontax crimes arising from the War on Crimes where
forfeiture is a principal punishment under Title 18), forfeiture is not an issue.
1000
See CCDM (31)810(1).
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5.
Procedures.
As noted above, forfeitures generally are subject to the new procedural safeguards in
CAFRA, but CAFRA expressly exempts IRC forfeitures from the new safeguards. Most seizures
in which the IRS is involved, however, are not IRC forfeitures. For example, the IRS is authorized
to conduct investigations of the money laundering provisions and incident thereto to make
forfeitures as authorized for money laundering instruments or proceeds. These non-IRC forfeitures
are generally subject to CAFRAs safeguards.
D.
Attorneys Fees Forfeitures.
I now turn to a subject that is near and dear to all of us -- attorneys fees. Are they subject
to forfeiture? What additional considerations are applicable in this type of case?
In Caplin & Drysdale, Chartered v. United States,1001 a prominent Washington law firm (with
a major tax practice) undertook the representation of a person the grand jury was investigating for
drug related crimes. An indictment was brought alleging the client to be in the drug business which
was a continuing criminal enterprise (CCE) in violation of 21 U.S.C. 848. Relying on forfeiture
provisions in the statute, the indictment sought forfeiture of the clients property. Shortly after the
indictment, the District Court entered a restraining order forbidding the client from transferring the
listed assets that were potentially forfeitable. Notwithstanding the restraining order, Reckmeyer paid
the firm $25,000 for preindictment legal services a few days after the indictment was handed down;
this sum was placed by the law firm in an escrow account. The firm continued to represent
Reckmeyer following the indictment.
The law firm, on behalf of the client, moved the District Court to modify the restraining order
to permit the use of the restrained assets to pay the law firm and also sought to exempt from any
postconviction forfeiture order the assets that he intended to use to pay petitioner. Before the court
acted, the client pled guilty in a plea agreement and, pursuant to the agreement, agreed to forfeit all
of the specified assets listed in the indictment. The District Court then denied his earlier motion to
modify the restraining order, concluding that the plea and forfeiture agreement rendered irrelevant
any further consideration of the propriety of the courts pretrial restraints. Shortly thereafter the
District Court entered an order of forfeiture.
The client then brought a proceeding under the forfeiture law for adjudication of the rights
of claimants to the forfeited assets. The law firm claimed an interest in $170,000 of Reckmeyers
assets, for services it had provided Reckmeyer in conducting his defense and an interest in the
$25,000 being held in the escrow account. The client argued alternatively that assets used to pay
an attorney were exempt from forfeiture under the statute, and if not, the failure of the statute to
provide such an exemption rendered it unconstitutional. The District Court granted the motion.
1001
491 U.S. 617 (1989).
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On appeal, the Court of Appeals found that the forfeiture statute, by not allowing payment
of attorneys fees, violated a defendants Sixth Amendment right to the counsel of his choice. On
en banc rehearing, the Court of Appeals reversed.
The Supreme Court held that the forfeiture was valid and did not impermissibly infringe the
taxpayers constitutional right to counsel. The Court first rejected an interpretation of the statute
that would have given the district courts equitable discretion to release the forfeited property for
attorneys fees. Thus, the Court moved quickly to the constitutional issue.
The Supreme Court held that the Sixth Amendment right to counsel did not give a defendant
the right to use assets subject to forfeiture to employ counsel of his choice. The Court held that the
system has guarantees that will assure a defendant the right to adequate counsel and even counsel
of his choice if he can afford such counsel from his nonforfeitable resources. It does not assure him,
however, that he can use assets subject to forfeiture to underwrite his counsel of choice.
This holding has two related aspects. First, and ostensibly most immediately at issue in
Caplin & Drysdale, the defendant may find criminal practitioners wary about undertaking
representation where there is a risk that they will not be paid. Second, it cautions us practitioners
who are entitled to be paid for our services that we need to be wary about the type of engagements
we accept.
Consider the following:
The attorney in a white-collar case -- just as in other matters -- should know
the statutes and prosecutorial policies that govern money laundering, currency
reporting requirements, and forfeiture of legal fees that may affect the attorneys
ability to retain fees paid. Arguably, in federal cases, under the so-called
relation-back doctrine, title to the proceeds of a crime vests in the government at
the time of its commission. Thus, even though a client may pay his or her attorney
preaccusation, before the attorney has any knowledge or belief that the government
will seek forfeiture, an argument can still be made that the funds are forfeitable. The
relation-back doctrine does not, however, prevent the attorney from asserting that
he or she is an innocent owner. While the federal government has generally not
sought to forfeit legal fees paid in instances where the attorney does not have notice
of the possibility of forfeiture, the practice has been upheld. If the forfeiture prevents
the defendant from having funds to have counsel of choice, however, a probable
cause hearing may be required to determine if there is a sufficient basis to believe the
funds are forfeitable. To avoid such a hearing, some prosecutors will consent to the
payment of reasonable trial fees out of restrained funds.
There is a statutory exemption under the money laundering laws for financial
transactions necessary to preserve a persons right to representation as guaranteed
by the Sixth Amendment to the Constitution, which, presumably, was drawn to
exempt criminal attorneys paid with the proceeds of criminal conduct from
prosecution for money laundering. Many cases hold, however, that the Sixth
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Amendment right to counsel does not attach until indictment. Therefore, an

argument can be made that money laundering laws are applicable to attorneys who
receive tainted funds from clients for pre-indictment legal services.1002
So what rights are available if the Government has seized the targets / defendants assets
prior to trial, thereby potentially denying him or her the ability to engage or continue with counsel,
or even at the time of indictment? Most courts recognize the defendants right to a prompt hearing
after indictment to test the validity of the seizure.1003
Perhaps more serious than the threat of losing legal fees, could the receipt of tainted money
be treated as a money laundering offense? This is not inconceivable, although in most criminal tax
cases it would not be in issue. The DOJ policy in this regard is:
Because the Department firmly believes that attorneys representing clients
in criminal matters must not be hampered in their ability to effectively and ethically
represent their clients within the bounds of the law, the Department, as a matter of
policy, will not prosecute attorneys under 1957 based upon the receipt of property
constituting bona fide fees for the legitimate representation in a criminal matter,
except if (1) there is proof beyond a reasonable doubt that the attorney had actual
knowledge of the illegal origin of the specific property received (prosecution is not
permitted if the only proof of knowledge is evidence of willful blindness); and (2)
such evidence does not consist of (a) confidential communications made by the client
preliminary to and with regard to undertaking representation in the criminal matter;
or (b) confidential communications made during the course of representation in the
criminal matter; or (c) other information obtained by the attorney during the course
of the representation and in furtherance of the obligation to effectively represent the
client.1004
This is an oddly worded relief provision, but as I have noted not commonly a concern in
criminal tax cases.
1002
Lawrence S. Goldman & Jill R. Shellow-Lavine, Pre-Indictment Representation in

White Collar Cases, 24 Champion 18 (2000) (footnotes omiitted). See also for a recent lamentation
on the issue, Barry Tarlow, Rico Report: Five Important Words on Fee Forfeiture: Getting it up
Front & Getting it in the End, 28 Champion 56 (2004).
1003
Jon May, Attorneys Fees and Government Forfeiture: How to Get Paid, Keep the Fee
and Not Become a Target of the Friendly Neighborhood Federal Prosecutor, 34 Champion 20, 23-4
(2010) (collecting and discussing the cases).
1004
USAM 9-105.600.
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E.
IRS Role in Forfeitures.
The IRS participates in the following forfeitures.

1.
The Internal Revenue Code forfeitures discussed above.
2.
Forfeiture of currency or monetary instruments with respect to which a report is
required under 31 C.F.R. 103.23 (the Customs CMIR for transportation of currency or monetary
instruments into or out of the United States).1005
The IRSs role in forfeiture seizures is outlined in IRM, Part 9 - Criminal Investigation, par.
9.
F.
Tax Considerations Related to Forfeitures.
Forfeitures can have tax consequences, so counsel should be prepared to deal with them.
Perhaps the most immediate issue is whether the defendant subject to forfeiture gets a deduction for
the amounts forfeited. The answer is no.1006
A related issue is whether appreciated assets subject to forfeiture will give rise to income
when sold to satisfy the forfeiture. The answer is yes, at least if the forfeiture is in terms of a stated
dollar amount (rather than the thing itself) and the forfeited assets are sold or applied to the forfeit
amount.1007
II.
Civil Disabilities Arising from Conviction.
A felony conviction may result in civil disabilities.1008 These are largely the result of state
law, but can have federal consequences. For example, some states disqualify felons from voting1009
which thereby disqualify them from voting in federal elections since the right to vote in federal
elections is determined by the right to vote in state elections.1010 Other examples of disqualification
under state law may include the right to hold public office, the right to serve on juries, and the right
to engage in certain professions and regulated industries. The federal law also authorizes federal
1005
See 31 C.F.R. 103.48.

Hackworth v. Commissioner, 155 Fed. Appx. 627 (4th Cir. 2005); and Murillo v.
Commissioner, T.C. Memo 1998-13, aff'd w/o published opinion 1998 U.S. App. LEXIS 35311 (2d
Cir. 1998)
1007
Carione v. Commissioner, T.C. Memo. 2008-262.
1008
See e.g., Fink, Tax Controversies: Audits, Investigations, Prosecutions, 22.03
summarizing these disabilities.
1009
See Richardson v Ramirez, 418 US 24 (1974) (California statute denying convicted
felons right to vote is constitutional).
1010
Constitution Art I, 2 and Amendment XVII.
1006
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agencies to refuse to do business with contractors who have been convicted of crimes which bear
upon their business integrity (e.g., false statements related to business).1011
III.
Immigration Matters Arising from Conviction.
Immigration status may be affected by conviction of an aggravated felony.1012 Conviction

of an aggravated felony will require deportation.1013 An aggravated felony is defined to include an
offense that:
(i) involves fraud or deceit in which the loss to the victim or victims exceeds
$10,000; or
(ii) is described in 7201 of the Internal Revenue Code of 1986 (related to
tax evasion) in which the revenue loss to the Government exceeds $10,000; . . .1014
The second subpart thus makes clear that a conviction under 7201 (tax evasion) is an
aggravated felony.1015 The question arises, however, whether other tax crimes that, in general
parlance, might be viewed to include fraud or deceit are covered in the subpart (i). After conflict
among the circuits, the Supreme Court resolved the issue by holding that other tax crimes can be
included in subpart (i), specifically 7206(1), tax perjury, and 7206(2), aiding and assisting.1016
1011
48 CFR 9.406-2(a)(3), (4) .

8 U.S.C. 1227(a)(2)(a)(ii).
1013
Deportation for an aggravated felony may permanently bar the person from reentry
to the United States. 8 U.S.C. 1182(a)(9)(A)(i)-(ii).
1014
8 U.S.C. 1101(a)(43)(M).
1015
A good argument could be made that the first part subsumes the second. See Carty
v. Ashcroft, 395 F.3d 1081 (9th Cir. 2005), cert den. sub nom. Carty v. Gonzalez, 546 U.S. 818
(2005) (dealing with whether a state conviction for willful failure to file a return with intent to
evade . . . tax is a crime of moral turpitude under 237(a)(2)(A)(ii)). The Carty court concluded
that the conviction was a crime of moral turpitude using reasoning that would sweep the second part
above (the 7201 part) under the first part. In doing so, the Court distinguished the troubling case
of United States v. Scharton, 285 U.S. 518 (1932), where the Supreme Court held that a statute that
then provided a special six year statute of limitations for defrauding or attempting to defraud the
United States did not apply to a conviction for willfully attempting to evade taxes (under what is
now 7201). In Scharton, the Supreme Court expressly rejected the arguments presented by the
government that fraud is implicit in the concept of evading or defeating and that any attempt to
defeat or evade a tax is said to be tantamount to and to possess every element of an attempt to
defraud the taxing body. Id. at 520-21. Perhaps Scharton and its progeny were the reason the
drafters of the Immigration Act specifically included 7201 as an aggravated felony.
1016
Kawashima v. Holder, ___ U.S. ___, 132 S. Ct. 1166 (2012). This seems to be a
straight-forward reading of the statute. The key conflicting decision in the courts of appeals was
Lee v. Ashcroft, 368 F.3d 218 (3d Cir. 2004) (majority opinion written by Judge Oberdorfer, a D.C.
District Judge, sitting by designation; Judge Oberdorfer was formerly AAG in charge of the Tax
Division, and thus has considerable background in interpreting and applying the tax laws upon
1012
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In applying this test, the focus is on the crimes statutory elements rather than the facts underlying
the crime and conviction.1017
Finally, a note of caution for practitioners. The attorney should advise or obtain another
qualified attorney to advise the defendant of the collateral consequences, including the immigration
consequences, of the charges and a plea to the charges if the defendant considers making a plea (as
will usually be the case). In Padilla v. Kentucky, ___ U.S. ___, 130 S.Ct. 1473 (2010),1018 the
Supreme Court determined that a failure to advise of the immigration consequences could be
ineffective assistance of counsel in violation of the Sixth Amendment. The Court tested the failure
under the Strickland1019 test requiring courts to determine: (i) whether counsels representation fell
below an objective standard of reasonableness; and (ii) whether there is a reasonable probability
that, but for counsels unprofessional errors, the result of the proceeding would have been different.
The Court found the immigration statute on point (drug conviction) was succinct, clear and
explicit as to the immigration consequences and, hence failure to advise did not meet the objective
standard of reasonableness. The Court remanded to the Kentucky Supreme Court to make the
second Strickland determination. And, of course, it goes without saying that an attorney actually
misadvising the client as to the immigration consequences would raise 6th Amendment issues.1020 Be
sure to cover this point with your clients and cover it effectively.
which the immigration issue turned; but the dissent in the case is by Judge, now Supreme Court
Justice, Alito). The gravamen of the Lee holding was that, if subpart (i) includes tax crimes, then
there was no need for subpart (ii) which was a tax crime that necessarily (at least in most
applications) would involve fraud and deceit. The inclusion of subpart (ii) created an inference that
other tax crimes was not includable in subpart (i). In Kawashima, rejecting that analysis, the
Supreme Court held that a straight-forward reading of (i) would include tax crimes other than
evasion so long as an element of the crime could be fairly interpreted to include fraud or deceit.
1017
Kawashima v. Holder, p. ___, 132 S.Ct. At 1172.
1018
For broader holdings as to effective assistance of counsel in a plea setting, see
Missouri v. Frye, ___ U.S. ___, 2012 U.S. LEXIS 2321 (2012) (failure to advise the defendant of
a time-limited plea offer by the prosecutor); and Lafler v. Cooper, ___ U.S. ___, 2012 U.S. LEXIS
2322 (2012) (providing the defendant highly questionable advice to reject a proffered plea and go
to trial instead).
1019
Strickland v. Washington, 466 U.S. 668 (1984).
1020
See e.g., United States v. Kwan, 407 F.3d 1005, 1015-16 (9th Cir. 2005) (collecting
and discussing cases), discussing inter alia United States v. Couto, 311 F.3d 179, 187-88 (2d Cir.
2002).
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IV.
Civil Tax Considerations.

A.
Relationship of Criminal and Civil IRS Functions.

1.
During the Investigation and Prosecution Phase.

a.
Historically Criminal Function Takes Precedence.
In the past, the IRS had a policy which generally required abeyance of IRS civil functions
(particularly audit) as to the target of a tax criminal investigation or prosecution until the criminal
aspect is concluded. This was formerly recognized in IRS Policy Statement P-4-84 which has been
superseded by Policy Statement 4-26.1021 The policy was based on several imperatives. First, given
the relatively few criminal investigations and prosecutions that can be actively pursued, the IRS will
want to focus most intently upon identifying those investigations that can turn into prosecutions
consistent with the Governments criminal enforcement priorities. Second, particularly in a fraud
or failure to file case, if the evidence is sufficient to justify ongoing criminal investigation or
prosecution, the IRS usually felt that the statute of limitations would be open for civil adjustments
at a later time under the fraud exception. (I deal with civil statutes of limitations at Ch. 4, par. 2(c).)
Third, if the IRS were to pursue the civil tax matter full bore, the taxpayer could pursue civil tax
litigation and might be able to undertake discovery of the Governments case, including the criminal
tax issues beyond the discovery normally allowed in criminal investigations and prosecutions. By
the same token, of course, the Government might use the civil proceedings to force the taxpayer to
either waive his Fifth Amendment privilege or face some penalty in the civil proceeding. Courts
often mitigate these concerns by staying the civil case pending resolution of the criminal
investigation and/or prosecution.1022
The policy was developed when the paradigm criminal tax investigation and prosecution
involved the taxpayer whose taxes were potentially subject to civil enforcement activity. As noted,
civil enforcement activity as to that taxpayer, on balance, could be suspended. But, different policies
came into play as the criminal tax enforcement system focused on targets who were not the
taxpayers involved such as in the case of the criminal tax shelter investigation and prosecution of
tax shelter promoters and others involved in peddling criminal tax shelters.
b.
Development - Parallel Proceedings / Investigations.
The IRS developed a more nuanced policy related to the interface of civil side initiatives with
criminal investigations and prosecutions. As a result of the change, reflected in Policy Statement
1021
IRM 1.2.13.1.11 Policy Statement 4-26 (Formerly P-4-84) (Approved 10-05-2005).

See generally Pollack, Parallel Civil and Criminal Proceedings, 129 F.R.D. 201
(1990) (discussing risks of parallel proceedings). For a leading Fifth Circuit case involving the
taxpayers institution of a civil refund suit in order to discover the fruits of the criminal
investigation, see Campbell v. Eastland, 307 F.2d 478, 487-89 (5th Cir. 1962) (stay of civil
discovery or protective order may have been appropriate remedy while criminal proceeding
pending). Why was this analogous authority not applied when President Clinton needed it?
1022
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4-26,1023 more civil side initiatives can proceed concurrently with the criminal investigation and
prosecution.1024 Generally, however, at least for examinations where the taxpayer is the target, the
examination activity will be curtailed or suspended altogether. In tax shelter investigations, the
investigation of the promoter target and the taxpayers can proceed simultaneously.
As noted, however, there can be simultaneous civil and criminal initiatives under the new
policy. However enamored IRS may now be about parallel proceedings, they do present issues that
may take the bloom off the rose. In cases involving agencies other than the IRS (SEC in particular),
the courts have expressed concern about such proceedings and on rare occasions have taken
remedial measures for egregious abuses, from evidence preclusion to dismissal of criminal cases.1025
So, although practitioners are seeing an increase in parallel proceedings, it is still the exception
rather than the norm.
Finally, as we noted above in discussing the so-called Caceres doctrine (relating to Miranda
warnings and developing a criminal case in the guise of a civil investigation),1026 the practitioner
handling the civil investigation must be alert to the risks involved in the criminal proceeding. Any
civil investigation where the taxpayer has material criminal exposure is an eggshell audit that must
be handled with sensitivity to the criminal risks. That exposure is enhanced if there is a parallel
criminal investigation where the actions in the civil examination may be used against the taxpayer
in the criminal investigation. The practitioner can directly ask the civil agent if there is CI activity
or even Fraud Technical Adviser activity. The civil agent should either respond honestly or decline
to answer (which is a form of response indicating that there is likely such activity). Many
practitioners will not want to ask the question directly because of concern of suggesting that criminal
risk is perceived. So, the drill will be to see how the information can be acquired with more indirect
interactions with the civil agent through engaging the agent in discussions which might suggest such
activity. But, in the final analysis, a straight-forward direct question should flush out the answer.1027
1023
IRM 1.2.13.1.11 Policy Statement 4-26 (Formerly P-4-84) (Approved 10-05-2005).

For a good discussion of some of the issues and processing in IRS parallel
investigations, see Shamik Trivedi, Parallel Criminal and Civil Investigations Require Caution,
Practitioners Say, 2012 TNT 35-23 (2/22/12).
1025
The high water mark in terms of sanctions was in United States v. Tweel, 550 F.2d
297 (5th Cir. 1977) where a tax indictment was dismissed because the civil agents actions misled
the taxpayer as to the criminal nature of the investigation. Since Tweel, the courts have applied its
dismissal remedy sparingly, looking for some express misrepresentation rather than just a joint use
of the fruits of the parallel investigations. See e.g., United States v. Stringer, 521 F.3d 1189 (9th Cir.
2008); and United States v. Carriles, 541 F.3d 344 (5th Cir. 2008); cf United States v. Rutherford,
555 F.3d 190 (6th Cir. 2009). Nevertheless, even when the courts refuse to dismiss or sustain a
dismissal, the Courts are careful to note that problems may be presented by such joint investigations
where fraud, deceit, trickery or misrepresentation is involved. See Stringer, supra, p.1198-1999.
1026
See p. 568.
1027
Shamik Trivedi, Parallel Criminal and Civil Investigations Require Caution,
Practitioners Say, 2012 TNT 35-23 (2/22/12) ("Usually I'm not going to wait around," Skarlatos
said. "I'll ask whether there is a fraud technical adviser in the background, or is there anything even
more going on.")
1024
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2.
Civil Considerations after Criminal Case.
After the criminal phase has concluded, CI is supposed to return the case to the civil function
for further audit or collection activity as appropriate. Usually, there will be additional tax liability
and interest, although the taxpayer may have reported and paid that during the criminal investigation
and prosecution. And there will often be civil penalties that could apply. I discuss the civil penalties
below.
My personal experience (quite anecdotal and certainly not enough to extrapolate definitive
conclusions from) is that the IRS does follow through and assess additional tax, interest and
penalties based on the results of the criminal phase, plus such other efforts as the IRS chooses to
make.
3.
Investigations That Identify Criminal Potential.

a.
Civil Enforcement - Audit and Collection Activity.
Civil investigations audits and enforcement activities after assessment may result in
referrals to CI and are probably the most fruitful source of IRS CI investigations.1028 I discuss
elsewhere in these materials some aspects of these civil investigations, but it is useful to revisit them
here.
If, in the course of a civil investigation, an agent or revenue officer believes or suspects that
fraud may have been involved, the agent or revenue officer is supposed to consult with his group
manager and with the Fraud Technical Advisor (FTA).1029 The Fraud Technical Advisor is an
officer in the local division who assists personnel in the division in determining whether and when
the case should be referred to CI.1030 When they agree that there is a firm indication of fraud, the
case should be referred to CI.1031 CI then takes over and investigates the criminal potential of the
1028
Mark Matthews, IRS Deputy Commissioner and formerly head of the IRS CI
function, noted in discussing the role of the fraud referral program, that it was the best place for
CID over the long run to go about getting good and quality tax cases. Allen Kenney, IRS
Enforcement Chief Announces Criminal Division's Expansion, 2005 TNT 52-10.
1029
The FTA is a member of a Fraud Technical Advisor Group, consisting of a Revenue
Agents and FTAs who cover multiple states and areas. IRM 1.1.16.10.1.2 (3/1/2007). The functions
of the Fraud Technical Advisor were previously assigned to persons in the civil examination and
collection functions who had different titles Fraud Technical Reviewer, Fraud Referral Specialist
and District Fraud Coordinator. However that position is titled, its principal role is to identify and
respond properly to indications of fraud, thereby enhancing the quality of referrals to CI, including
coordination with CI as deemed appropriate. For a helpful short summary of the role of the FTA,
see Jeremiah Coder and Lee A. Sheppard, IRS Official Explains Fraud Technical Advisers, 2010
TNT 187-3 (9/28/10).
1030
See IRM 4.19.10.4 Fraud Referrals (01-01-2010).
1031
E.g., IRM 25.1.8.9 Collection Case Disposition (11-04-2008) (firm indication of
fraud in collection case) and 4.23.9.6.2 Firm Indications of Fraud (05-14-2008) (discussing firm
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matter to the extent consistent with CIs priorities and resources. As noted above, the historic rule
has been that, once CI has the case, the civil matters are deferred.
A recent TIGTA report confirms that, historically, the inter-agency referrals from other IRS
programs, including civil audits, are a primary source for CI investigation legal source referrals.1032
b.
General Investigation (GI) Programs.
Besides individual audit or collection activity, the IRS has a general investigation (GI)
program described as follows:
(1)
A general investigation (GI) is a study, survey, canvassing, or coordination
activity related to a group, an activity, or a CI program/sub-program to identify
possible noncompliance with the laws enforced by IRS. General investigations are
also used to track investigative imprest funds.
(2)
A GI normally involves areas of non-compliance for a specific occupation,
industry or CI sub-program. When the focus shifts from the group to the potential
criminal activity of an identified individual or entity, a primary investigation (PI)
will be opened. As additional information is developed which indicates prosecution
potential exists, a subject criminal investigation (SCI) will be opened.1033
B.
Penalties.
There are a host of potential civil penalties that can apply in addition to the criminal
penalties. The civil penalties are remedial rather than punitive in nature and are not foreclosed any
criminal prosecution or conviction.1034
1.
Civil Fraud Penalty.
In the tax setting, the civil penalty most applicable to tax crimes is the fraud penalty under
6663.
Sec. 6663. Imposition of fraud penalty.
indication of fraud in employment tax investigation). I discuss below certain issues related to the
civil function continuing to develop the case after its has a firm indication of fraud. See text below
beginning on p. 568. Whether the case is referred to CI in a timely manner is not presently
important for the points I make in the text above and therefore defer that discussion.
1032
TIGTA July 2008 CI Report. This Report concludes that the annual number of
referrals received has increased, trending to a near all-time high in FY 2007.
1033
IRM 9.4.1.4 General Investigations (12-21-2005).
1034
Helvering v. Mitchell, 303 U.S. 391 (1938) (civil fraud penalty under 6663
(discussed in the text immediately below) may be imposed after conviction in criminal case is
permitted because the civil fraud penalty is remedial in nature and not further criminal punishment).
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(a) Imposition of penalty. If any part of any underpayment of tax required

to be shown on a return is due to fraud, there shall be added to the tax an amount
equal to 75 percent of the portion of the underpayment which is attributable to fraud.
(b) Determination of portion attributable to fraud. If the Secretary establishes
that any portion of an underpayment is attributable to fraud, the entire underpayment
shall be treated as attributable to fraud, except with respect to any portion of the
underpayment which the taxpayer establishes (by a preponderance of the evidence)
is not attributable to fraud.
(c) Special rule for joint returns. In the case of a joint return, this section
shall not apply with respect to a spouse unless some part of the underpayment is due
to the fraud of such spouse.
The statute does not define fraud, but it may be viewed as the civil counterpart of criminal
tax evasion in 7201.1035 The courts dealing with the civil fraud penalty do not usually state the
standard as the crisp elements in 7201 affirmative act, tax due and owning and willfulness (the
standard Cheek formulation being intentional violation of a known legal duty). Those courts do,
however use words that, in my view, say the same thing. For examples, in civil fraud cases, courts
had stated: (i) Fraud is the intentional commission of an act or acts for the specific purpose of
evading tax believed to be due and owing;1036 and (ii) fraud requires that the taxpayer have
intended to evade taxes known to be due and owing by conduct intended to conceal, mislead or
otherwise prevent the collection of taxes and that is an underpayment.1037 In making the
determination, as with criminal cases, courts will often look to certain common patterns indicating
fraud referred to as badges of fraud, such as unreported income, failure to keep adequate books,
dealing in cash, etc.1038 The key differences between the two is that 6663 is a civil penalty and
different burdens of proof apply as I note later.
1035
The courts dealing with the civil fraud penalty do not usually state the standard as
the crisp elements in 7201 affirmative act, tax due and owning and willfulness (the standard
Cheek formulation being intentional violation of a known legal duty). Those courts do, however
use words that, in my view, say the same thing. For example, Fraud is the intentional commission
of an act or acts for the specific purpose of evading tax believed to be due and owing. Erikson v.
Commissioner, T.C. Memo 2012-194. Fraud requires that the taxpayer have intended to evade
taxes known to be due and owing by conduct intended to conceal, mislead or otherwise prevent the
collection of taxes and that is an underpayment. Nelson v. Commissioner, T.C. Memo. 1997-49.
See also Fiore v. Commissioner, T.C. Memo. 2013-21 (Fraud is the willful attempt to evade tax
and using the criminal law concept of willful blindness to find the presence of civil fraud; note that,
in the criminal law, the concept of willful blindness goes by several names, including conscious
avoidance which is the one I usually use.)
1036
Erikson v. Commissioner, T.C. Memo 2012-194.
1037
Nelson v. Commissioner, T.C. Memo. 1997-49.
1038
E.g., Kosinski v. Commissioner, 541 F.3d 671, ___ (6th Cir. 2008). For use of a
negative inference from assertion of the Fifth Amendment privilege in concluding that the IRS had
met its burden of proving civil fraud by clear and convincing evidence, see Loren-Maltese v.
Commissioner, T.C. Memo. 2012-214.
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The civil penalty, although clearly a penalty, does not constitute double jeopardy when
asserted after a criminal conviction for tax evasion because the penalty is remedial in nature rather
than punitive.1039 This penalty is often referred to as the civil fraud penalty to distinguish it from a
criminal fraud penalty.
For the initial showing of fraud, the IRS must prove fraud by clear and convincing
evidence.1040 Other than to state the obvious that clear and convincing evidence lies somewhere
between more likely than not evidence and beyond a reasonable doubt evidence,1041 I wont offer
in the text of this book a more finely calibrated discussion, but do offer some materials in the
footnote below.1042 Once the Government meets this burden to show fraud as to some portion of the
1039
Helvering v. Mitchell, 303 U.S. 391 (1938). OK, perhaps the articulating of the
reasoning is not the best, but still, Mitchell does clearly establish the bottom-line that the penalty
will not be denied the IRS simply because the taxpayer has been criminal prosecuted for the fraud.
1040
See 7454(a) (which provides that the IRS must prove fraud; that it prove fraud by
clear and convincing evidence is nonstatutory, but has developed as a consistently applied rule (see
e.g., Tax Court Rule 142(b)).
Section 7454(a) was initially enacted in a 1928 Revenue Act provision that applied by its
terms only in the Tax Court. Revenue Act of 1928, c. 852, 601, 45 Stat. 791; see Paddock v.
United States, 280 F.2d 563 (2d Cir. 1960). Indeed, the section refers to petitioners, the term used
for the taxpayer in Tax Court deficiency proceedings; notwithstanding that reference, however, the
few courts addressing the issue say that the burden is on the IRS to prove fraud regardless of the
forum that the fraud issue arises. Leo P. Martinez, Tax Collection and Populist Rhetoric: Shifting
the Burden of Proof in Tax Cases, 39 Hastings L.J. 239, 263-264 (1988) (citing Paddock and Carter
v. Campbell, 264 F.2d 930, 937-38 (5th Cir. 1959); Trainer v. United States, 145 F. Supp. 786, 787
(E.D. Pa. 1956); see Lee v. United States, 466 F.2d 11, 14 (5th Cir. 1972)).
1041
Even this generalism may be questioned. Based on empirical studies, some authors
suggest that juries actually perceive the clear and convincing standard to be greater than the beyond
a reasonable doubt standard. See Lawrence Solan, Refocusing the Burden of Proof in Criminal
Cases: Some Doubt about Reasonable Doubt, 78 Tex L Rev 105, 128-129 (1999). Bench trials,
presumably would not present this logical inconsistency but perhaps suffer from some judges
relaxed assessments of the quantum of proof required for proof beyond a reasonable doubt.
1042
One author says that typical jury instructions require persuasion that the fact is
highly probably true. Michael S. Pardo, Second-Order Proof Rules, 61 Fla. L. Rev. 1083, 1097
n. 80 (2009) (citing 7th Circuit Pattern Jury Instructions and See McCormick on Evidence 340
(John W. Strong ed., 5th ed. 1999) (1954)). Playing the numbers game, Judge Jack B. Weinstein,
certainly one of the deeper thinkers in this area, observed that the lesser clear and convincing
standard of proof (the standard applicable in civil fraud matters such as a civil fraud penalty under
6663) might be quantified as proof above 70%. See United States v. Copeland, 379 F. Supp. 2d
275 (ED NY 2005), affd United States v. Copeland, 2007 U.S. App. LEXIS 19794 (2d Cir. 2007),
quoting United States v. Fatico, 458 F. Supp. 388, 411 (E.D.N.Y. 1978). Other thoughtful observers
quantify the proof for clear and convincing at 75%. See Lewis Kaplow, Burden of Proof, 121
Yale L.J. 738, 779 n. 77 (2012) (citing a survey of federal judges showing a range of 70% to 80%,
with an average of 74.99%. Still, however defined, authors have expressed concern that the concept
is confusing and indeed has been interpreted by mock jurors to require proof stronger than beyond
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underpayment by clear and convincing evidence, the taxpayer then bears the burden of establishing
by a preponderance of the evidence which portion, if any, of the underpayment is not attributable
to fraud.
This penalty will play out as follows in a civil case in which the IRS asserts the penalty
following a criminal investigation and/or prosecution: The IRS must prove fraud by clear and
convincing evidence.1043 The taxpayers prior conviction for tax evasion will be preclusive on the
issue of fraud in the civil suit under collateral estoppel principles.1044 A prior conviction of any
charge that does not include fraudulent underpayment of tax (e.g., 7206(1)) is not preclusive under
principles of collateral estoppel, so that the taxpayer is free to contest the imposition of the civil
fraud penalty and put the Government in the position of proving fraud by clear and convincing
evidence.1045 If, however, the taxpayer is acquitted of tax evasion, the acquittal merely means that
the taxpayer was not guilty beyond a reasonable doubt and thus the IRS is not precluded from
proving by clear and convincing evidence that the taxpayer is liable for the civil fraud penalty.1046
Lets test our understanding of collateral estoppel.
Example 1: For tax year 1, taxpayer fraudulently claims large deductions, thus wiping out
his year 1 tax liability and creating a net operating loss on the tax year 1 tax return filed 4/15 of year
2. Taxpayer elects not to carryback his losses, and therefore carries them forward. He claims some
portion of the NOL carryforward in each of the years 2 through 4 on 4/15 of each succeeding year
(e.g., the year 2 tax return is filed on April 15 of year 3, etc.). On 5/1 of year 5 (shortly after filing
the year 4 tax return), he is indicted for tax evasion for years 1 through 3, each year being a separate
a reasonable doubt. See Pardo, supra, p. 1097.

I discuss elsewhere in this text the difficulties in conveying to a jury and conceptualizing as
an interested observer precisely what evidence beyond a reasonable doubt is and, in the footnotes
in that discussion, do some more bracketing of the various levels of proof, including clear and
convincing; I refer the reader to that discussion (particularly in the footnotes). See discussion
beginning on p. 689.
1043
Section 7454(a); Tax Ct. R. 142(b).
1044
Helvering v. Mitchell, 303 U.S. 391 (1938).
1045
Wright v. Commissioner, 84 T.C. 636 (1985). Note, however, that although the
conviction of a crime not having fraud as an element (such as most prominently 7206(1)) will not
be preclusive, the context of the conviction might be evidence of civil fraud for imposing the civil
fraud penalty. See e.g.,, Evans v. Commissioner, T.C. Memo. 2010-199 (Although Evans'
conviction for subscribing a false tax return does not collaterally estop him from denying that he
fraudulently understated petitioners' income tax liability, his conviction is evidence of fraudulent
intent). For example, the taxpayers plea allocution or plea agreement may contain sufficient
admitted facts which would be evidence of the crime and might establish the existence of fraud by
clear and convincing evidence. For this reason, it is important to be careful about the contents of
the admissions the taxpayer makes during the course of the criminal proceeding at t least to
anticipate their potential effect upon the subsequent civil proceedings.
1046
Helvering v. Mitchell, 303 US 391, 401 (1938).
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count.1047 He is subsequently convicted on all counts. Based on the foregoing, the conviction of tax
evasion for years 1 through 3 is collateral estoppel as to civil fraud in years 1 through 3. But, is the
year 1 conviction collateral estoppel on the civil fraud issue as to the year 4 return? One court has
so held, reasoning that the claiming of a fraudulent NOL carryforward perforce renders the return
fraudulent and, since the fraudulent claiming of the NOL loss itself has already been litigated
between the parties in the NOL year (year 1 in this example and, by extrapolation, years 2 and 3 for
which he was convicted for carrying the fraudulent loss to those years), it is perforce collateral
estoppel in the subsequent nonconviction year (year 4 in the example).1048 What would you argue
in response?
You would argue, of course, that the convictions in the prior years are not preclusive on the
issue of whether the taxpayer had the requisite intent in the fourth year. It is at least conceivable that
he would not. For example, what if the carryforward to year 4 were relatively small in amount, and
the taxpayer perhaps just did not think about the issue in year 4 (his return preparer just carried it
forward from last years return without discussing it with the taxpayer)? By analogy, in the criminal
proceeding involving tax evasion charges for years 1 through 3, could the judge have instructed the
jury that, if it found the taxpayer guilty for year 1, it must find him guilty for years 2 and 3? I think
not, because even though the fraudulent tax benefit traced to year 1, the issue is the taxpayers guilt
at the time he filed his year 2 or 3 return. If that finding of guilt is not preclusive in the criminal
proceeding, why should a finding of guilt be preclusive in a noncharged year?
Example 2: Assume the same example. In the sentencing phase, the quality of the evidence
is as follows: (1) the tax loss number established by a preponderance of the evidence for each of the
years 1-3 is $100,000; and (2) the sentencing judge is in equipoise as to an additional $25,000 and
thus cannot include that amount in the tax loss number. In the ensuing civil fraud case, the parties
agree that the total underpayment in each of the first 3 years was $200,000. Assume that the
Government establishes by collateral estoppel its initial burden to show fraud by clear and
convincing evidence (i.e., the evasion conviction for years 1-3 establishes beyond a reasonable doubt
that some amount of tax was evaded, hence it is collateral estoppel as to the Governments ability
to show fraud by clear and convincing evidence). Then, assume that the evidence in the civil trial
shows by a preponderance of the evidence that $75,000 of the $200,000 understatement is not due
to fraud and that $100,000 of the $200,000 understatement is due to fraud (the latter being the same
as at the sentencing phase). Just as in the sentencing phase, however, the civil trial finder of fact
is in equipoise as to the remaining $25,000. Under 6663, the civil fraud penalty base is $125,000
for each of the years 1-3.
What I want this example to illustrate is that the only difference between the sentencing
finding as to the tax loss number and the civil fraud base is with respect to a possible inclusion or
exclusion of the amount, if any, as to which the trier in the civil case is in equipoise. In both
proceedings (sentencing and civil trial), the base is the same (i.e., at sentencing it is the tax loss
1047
Ok, set aside the issue of why he would have been so stupid as to file the return
claiming the fraudulent NOL carryforward to the year 4 return when he knew (as he certainly would
have) that he was under investigation and likely indictment for tax evasion for years 1 through 3.
1048
Gandy Nursery, Inc. v. United States, 318 F.3d 631 (5th Cir. 2003).
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number and in the civil trial it is the civil fraud penalty base which define the same base). Yet, as
illustrated in the example, the base is a different amount at sentencing than at the civil trial solely
because of the phenomenon of equipoise. Equipoise is a useful tool for analyzing burden of proof
but, I submit, not helpful in real world cases where it is only the rare case that has key findings turn
upon a state of equipoise.1049 In other words, for the real world, the example illustrates a
phenomenon not likely to occur. For this reason, I have argued that, for judicial estoppel and
prudential reasons, the sentencing findings as to the tax loss number should determine the civil
penalty base.1050 The case authority, however, rejects collateral estoppel, although the circumstances
may be distinguishable.1051
1049
See Cigaran v. Heston, 159 F.3d 355, 357 (8th Cir. 1998) (The shifting of an
evidentiary burden of preponderance is of practical consequence only in the rare event of an
evidentiary tie . . . .) (emphasis supplied); see also Polack v. Commissioner, 366 F.3d 608, 613 (8th
Cir. 2003) (citing the Cigaran case).
1050
I have so argued in John A. Townsend, Collateral Estoppel in Civil Cases Following
Criminal Convictions, 2005 TNT 4-28. As discussed in my article, the IRS and the Courts had
cryptically declined to apply collateral estoppel to set the civil fraud base at the tax loss number.
For the reasons noted, I believe those positions are based upon incomplete understanding of the role
of the tax loss number in the scheme of the Sentencing Guidelines. Since my article, Booker and
its progeny, has caused a lessening of the role of the Guidelines in sentencing, so that my arguments,
if ever persuasive, certainly are less so now. I discuss this matter further in the next footnote.
1051
Kosinski v. Commissioner, 541 F.3d 671 (6th Cir. 2008), a well reasoned and
nuanced opinion citing, inter alia, the Booker shift in binding effect of the Sentencing Guidelines
and Maciel v. Commissioner, 489 F.3d 1013 (9th Cir. 2007). Two points may be worth
consideration for those willing to not accept these holdings at face. First, the Kosinski opinion
makes clear that, although the scope of its holding might suggest that any sentencing finding would
not be preclusive, it was in fact holding only that tax loss findings were not preclusive. Second, in
Maciel the court applied a presumption against collateral estoppel for sentencing findings on but
seemed to allow the possibility that the presumption could be overcome. Maciel involved a situation
where the Court found, under the facts in the sentencing proceeding, the Government has little
incentive to litigate the issue of evasion. The Maciel Court had earlier quoted 18 Charles Alan
Wright et al., Federal Practice and Procedure 4423, at 612 (2d ed. 2002) as follows: The most
general independent concern reflected in the limitation of issue preclusion by the full and fair
opportunity requirement goes to the incentive to litigate vigorously in the first action. So, at least
arguably, this holding may not apply where the finding of no fraud or the tax loss number was in the
context of an incentive to litigate i.e., real sentencing consequences could turn upon the dispute.
In Morse v. Commissioner, 419 F.3d 829 (8th Cir. 2005), the taxpayer was convicted for tax perjury
( 7206(1)). The conviction itself is not preclusive as to either the amount of the deficiency or the
civil fraud penalty, because neither is an element of the offense. The taxpayer argued, however, that
the order of restitution at sentencing was preclusive. Focusing only on the conviction (and not the
judicial determinations at sentencing), the Court held that An order for criminal restitution is not
essential to the judgment of conviction against a criminal defendant because it [is] not an element
of the crime of conviction. [Citation omitted.] Finally, it is interesting that, although the trend in
authority is to reject collateral estoppel for sentencing findings, do not assume that that is always
the case. To use the old saying that consistency is the hobgoblin of small minds, at the same time
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Example 3: Assume that, in the sentencing phase, the sentencing court is unable to determine
a tax loss number and thus determines the guidelines without a tax loss number. (You will recall
that Base Offense Level applies in that case.)1052 Is the sentencing courts inability to determine a
tax loss number by a preponderance of the evidence collateral estoppel against the IRS on that issue
in the subsequent civil case? I would argue that it should be. If the Government has been unable
to prove any fraudulent underpayment in the sentencing phase by a preponderance of the evidence,
why should it be allowed to have a second bite at the judicial resource apple where it is required to
make an affirmative showing by clear and convincing evidence? I argue that it should be.
Note that, if collateral estoppel were to apply to the tax loss number sentencing findings
(still, I think, an open issue), the preclusive effect would be a two way street. It would preclude the
IRS from getting a larger civil penalty base but would preclude the taxpayer from getting a lower
one (provided, of course, that the IRS meets its initial burden of showing fraud by clear and
convincing evidence (a showing it can make by collateral estoppel from a criminal finding to that
level of proof (i.e., guilt of tax evasion) or by actual evidence in the civil case).
Returning from this esoterica of collateral estoppel, the big picture you should remember
about the civil fraud penalty is that it is a big penalty that attends tax criminal misconduct. The
taxpayer can count on the fraud penalty being asserted if he or she is convicted. Similarly, as
suggested, even if the taxpayer is acquitted, the IRS can and usually will assert the fraud penalty
where it has recommended the taxpayer for prosecution even if ultimately not prosecuted or
convicted. And, keep in mind that fraud not only controls application of the civil fraud penalty, but
also will usually govern whether the statute of limitations after a criminal trial is still open.
Also, the theory of collateral estoppel is that it can apply to those in privity in the earlier
litigation in which the fact was determined. However, the application of this principle to the tax
fraud penalty appears limited in application.1053
I include elsewhere in these materials the DOJ Taxs policy on resolving civil taxes,
including the fraud penalty, in pleading to criminal charges.1054
as denying preclusive effect to tax loss findings when the taxpayer attempts to invoke the doctrine,
courts appear willing to permit the doctrine in other cases. See Arguelles-Olivares v. Mukasey, 526
F.3d 171 (5th Cir. 2008) (accepting a PSR determination of the tax loss number that was adopted
by the sentencing court as a finding of the tax loss for purposes of determining that in excess of
$10,000 was involved for sentencing purposes).
1052
A variation on this theme happened in United States v. Roselli, 366 F.3d 58 (1st Cir.
2004).
1053
E.g., C.B.C. Super Markets, Inc. v. Commissioner, 54 T.C. 882, 894-96 (1970)
(holding that a wife is not collaterally estopped on fraud issue by husbands conviction of tax
evasion; further holding that the corporation whose return was falsified by the officer convicted of
tax evasion for a false corporate return not collaterally estopped).
1054
See discussion at p. 387.
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2.
Failure to File.
The civil penalty applicable to failure to file is the failure to file penalty in 6651. The
elements of the penalty are the same as the elements of the offense of failure to file under 7203.
The taxpayer must have a duty to file and must have failed timely to file. The penalty is 5% per
month, with a maximum penalty of 25%. If, however, the failure to file is fraudulent, the penalty
is increased to 15% per month, with a maximum penalty of 75%. You should note that a fraudulent
failure to file is not the same thing as tax evasion under 7201 which requires an affirmative act in
addition to failure to file. The increased failure to file penalty will apply if the mere failure to file
is fraudulent. The question has been raised whether a conviction under 7203, willful failure to file,
will estop the taxpayer as to the increased failure to file penalty. The answer is probably no.1055
The failure to file penalty base is the tax required to be shown on the return1056 but that base
is reduced by the tax that has been paid (e.g., by withholding or estimated taxes) by the due date of
the return.1057
The failure to file penalty does not apply if the fraud penalty is assessed.
3.
Other Penalties.
There are civil penalties that parallel other criminal penalties. Thus, 6701 imposes a
penalty for aiding and assisting (including advising) with respect to a document in connection with
a material matter involving the internal revenue laws where the person knows or has reason to
believe that the document will result in an understatement of tax. The penalty is $1,000 for
individuals and $10,000 for corporations, with one penalty per taxpayer per period.
There are a host of other penalties that could apply in circumstances in which criminal
prosecution is a potential. We cant deal with them here.
C.
Civil Statutes of Limitation.
The civil statute of limitations is generally three years.1058 The exceptions most pertinent
here are (1) the civil statute remains open forever in the case of a false or fraudulent return or an
attempt to evade or defeat the tax;1059 and (2) the civil statute remains open forever if no return is
1055
See Dunlap v. Commissioner, T.C.M. 1993-187.

6651(a).
1057
6651(b).
1058
6501(a).
1059
6501(c)(1) & 6501(c)(2). Fraud is defined the same as for the 6663 civil fraud
penalty. Rhone-Poulenc Surfactants & Specialties, L.P. v. Commissioner, 114 T.C. 533, 548 (2000).
As I note in discussing the civil fraud penalty, fraud those these civil purposes is the same as tax
evasion under 7201 with a different burden of proof clear and convincing for civil fraud as
opposed to beyond a reasonable doubt for tax evasion.
This unlimited statute applies even if the fraud is not that of the taxpayer(s) signing the return
1056
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filed.1060 In addition, the civil statute is extended from 3 to 6 years if the taxpayer makes a 25%
omission from gross income.1061
In Badaracco, et. al. v. Commissioner,1062 the Supreme Court held that the filing of a
fraudulent original return keeps the civil statute of limitations open forever, even if a subsequent
nonfraudulent amended return is filed.1063 Thus, if the taxpayer filed a fraudulent original return,
there is no civil tax advantage to filing a nonfraudulent amended return after a criminal investigation
has started. (There may be other strategies for doing so (e.g., the voluntary compliance policy), but
there is no civil tax advantage.)
What happens if the taxpayer fraudulently fails to file a return and then, even after the IRS
begins an investigation, files a nonfraudulent original return?1064 The statute of limitations for
assessments is three years from the filing of the delinquent nonfraudulent original return (or six
years if there is a 25% omission).1065 But, the unlimited statute in 6501 applies only if a fraudulent
return was filed. A fraudulent failure to file is not a fraudulent return. Thus, there may be a civil
tax advantage from filing a nonfraudulent original, but delinquent, return after a criminal
investigation has started.
(e.g., if the preparer fraudulently prepares the return and the taxpayers are not aware of the fraud).
Allen v. Commissioner, 128 T.C. 37 (2007). Allen superficially appears correct from a statutory
analysis perspective (the statute text requires only that the return be fraudulent) and rests on a policy
notion that the IRS needs more time to audit a fraudulent return whether taxpayer fraud is involved
or preparer fraud is involved. But the opinion has been soundly criticized because it is cryptic does
not even consider, much less properly consider, history and context. Bryan T. Camp, Presumptions
and Tax Return Preparer Fraud, 120 Tax Notes 167 (2008) and Bryan T. Camp, Tax Return Preparer
Fraud and the Assessment Limitation Period, 116 Tax Notes 687 (Aug. 20, 2007).
1060
6501(c)(3).
1061
6501(e).
1062
464 U.S. 386 (1984).
1063
The one exception to the rule in Badaracco is that, if a taxpayer files an original
fraudulent return before the original due date or during an extension period and then, on or before
the due date or the extended due date, respectively, the taxpayer files a nonfraudulent amended
return, the amended return will be treated as the original return (referred to as a superseding
return) for all purposes. Cf. ILM 200645019 (6/20/06), reproduced at 2006 TNT 219-22. Thus,
the Badaracco gambit would have worked had the nonfraudulent amended return been filed before
the original due date or, if on extension, before the extended due date. In the real world, however,
amended returns are rarely filed before the due date of the return or by the extended due date. If you
happen, however, to get a client in that window of time, you have an easy fix for both his or her
criminal exposure and civil penalty exposure simply file a nonfraudulent superseding return by
the due date or extended due date, respectively.
1064
Rev. Rul. 79-178, 1979-1 C.B. 435. The concept of a fraudulent failure to file is
recognized in 6651(f) which imposes the same maximum civil penalty (75%) as the fraudulent
return civil penalty under 6663.
1065
Bennett v. Commissioner, 30 T.C. 114 (1958); see also Rev. Rul. 79-178, 1979-1
C.B. 435.
- 442 -
As noted above, the criminal statute of limitations for tax crimes is six years, but some of the
companion Title 18 offenses have a five year statute. While the criminal investigation and trial, if
pursued, is going on, the criminal tax aspects take priority, meaning that the Government generally
does not pursue the civil tax liability. Given the time it takes the Government to discover and
investigate a tax crime, the normal three year civil statute of limitations may well have expired
before the Government could possibly complete the criminal case. This means that, in order to
prevent the loss of the actual underlying tax revenue while the criminal matter is pending, the
Government will have three choices: (1) let the normal civil statute lapse, counting on its ability to
prove civil fraud in the ultimate civil tax matter to be pursued after the criminal tax matter is
resolved; (2) rely upon the six year statute for 25 % omissions, if the facts permit, and hope that the
criminal matter is resolved in six years; or (3) seek a consent to extend the statute of limitations from
the taxpayer, the putative defendant in the criminal investigation.
Sometimes the Government, to guard against the risk that it may not be able to prove fraud
in the ensuing civil case, may request a consent to extend the statute of limitations while the criminal
investigation or prosecution is pending. Should the taxpayer sign one? That decision can only be
made with a careful review of the facts. But, among the factors you will want to consider are that,
if the taxpayer does not sign a consent, the IRS may send a notice of deficiency, which will give the
taxpayer 90 days to go to the Tax Court. If he does so, the risk in the civil proceeding is that the
Government would be able to obtain discovery (as usual in civil proceedings) beyond the discovery
that the Government would be entitled to in a criminal case or, if the taxpayer asserted his Fifth
Amendment privilege in the civil case, he might be at risk of dismissal. The Tax Court would
probably stay the case pending resolution of the criminal tax matter, but there is no certainty that that
would be the case. And, while the case is in the Tax Court, the statute of limitations for the year is
effectively stayed.
In this environment, many practitioners see no particular advantage to forcing the
Governments hand by refusing a consent. I take a different approach. I dont like consents to
extend the statute of limitations, so I would want to see a very strong affirmative reason to give one.
I dont think the foregoing reason is strong and positive enough. And, if the Governments
investigation to date is not very strong (although with more time and investigative resources it might
be made stronger), the Government might just stop the criminal investigation and let the civil tax
consideration run its course. So, I would seriously question whether, absent most unusual
circumstances, it is in the taxpayers interest to sign a consent.
D.
Civil Tax Liability and Pleas.
As noted above, one factor in a downward reduction for acceptance of responsibility is to

pay the tax loss. Certainly, if possible, one should pay the tax loss in order to make that pitch at the
sentencing hearing. The payment is not an admission of liability or that the statute has not run. The
taxpayer will still be in a position to argue about the liability later. The DOJs policy with regard
to the civil tax considerations is set forth above.1066
1066
See p. 387.
- 443 -
E.
Grand Jury Material and Civil Tax Liability.
As I cover below,1067 FRCrP Rule 6(e) prohibits the IRS from using grand jury matters in
developing its civil tax position as to the taxpayers liability without a pending judicial proceeding
and a Rule 6(e)(3)(C)(I) order. If, however, the taxpayer resolves his civil tax liability incident to
the plea negotiation, it would appear that grand jury matters can be used. Query, whether such use
defeats the integrity of Rule 6(e)?
V.
Vocational Disabilities and Discipline for Tax Crimes.

A.
Professional Discipline.
Professionals, including tax professionals (lawyers and CPAs) are subject to discipline within
their areas of practice for committing tax crimes. In Texas, for example, it is common to see
periodic public notices of attorneys who have been disbarred or suspended after convictions for tax
crimes.
In In re Wray, an unpublished opinion of 4th Circuit (12/19/05), the issue was whether the
crime of failure to pay federal income tax was a serious crime for purposes of disbarment from
the federal district court under the Federal Rule of Disciplinary Enforcement which defined a serious
crime as:
any felony and any lesser crime a necessary element of which, as determined by the
statutory or common law definition of such crime in the jurisdiction where the
judgment was entered, involves false swearing, misrepresentation, fraud, willful
failure to file income tax returns, deceit, bribery, extortion, misappropriation, theft,
or an attempt or a conspiracy or solicitation of any other to commit a serious
crime.
Wray was an attorney who had been convicted of failure to pay income tax which, as you will recall,
is a misdemeanor. You will also recall that intentional violation of a known legal duty (willfulness)
is an element of the crime. The district court found that the crime of failure to pay crime was a
serious crime under this definition because Wray knew his failure to pay was unlawful. The Court
of Appeals reversed, reasoning in its unreported opinion cryptically:
On appeal, it is contended that Wray's offense constituted a serious crime
because it involved deceit. As an initial matter, it is not clear that Wray's conduct
was in fact deceitful. The prosecutor conceded that Wray did not commit fraud or
conceal income in an attempt to avoid tax liability; he simply chose not to pay his
full tax obligation. Id. at 48-49. More importantly, even if Wray's conduct did
involve deceit, that would not render his offense a serious crime. The question is
not whether Wray's conduct involved deceit; it is whether deceit is a necessary
element of the crime of willful failure to pay taxes. It is not. To prove willful failure
1067
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to pay income taxes, the government must show only that (1) a tax was due and
owing; (2) the taxpayer did not pay the tax within the required time; and (3) the
failure to pay was willful. See 26 U.S.C. 7203.
In short, Wray's misdemeanor offense of willful failure to pay income taxes
does not constitute a serious crime within the meaning of Rule I.B, and the district
court abused its discretion in concluding otherwise. Accordingly, the judgment of
the district court is reversed.
In a recent disciplinary proceeding in New York, a practitioner was suspended from practice
for one year for failure to file federal, state and city income tax returns and pay resulting taxes for
over 10 years.1068 The court noted in imposing this sentence that, although some lengthy tax
delinquencies in earlier cases might have resulted in a lesser sentence, The aggravating factors
vastly outweighed the mitigating factors.
B.
Disbarment to Practice Before the IRS.
Tax professionals may be disbarred from practice before the IRS under Circular 230,
published at 31 Code of Federal Regulations, pt. 10. The IRS has an office the Office of
Professional Responsibility (usually acronymed to OPR) which can institute proceedings when
it is advised of conduct potentially within the scope of Circular 230. Obviously, conviction for a
tax crime can fall within that scope. And, as with the civil fraud penalty, because of a standard for
sanctions that is requires a lesser standard of proof than a criminal case, OPR can act even if the
client is acquitted in the criminal case or the Government drops a charge.
C.
Other.
Any taxpayer in a profession or business that requires other types of regulation or licensing
needs to check the applicable rules to determine if their livelihoods will be affected. For example,
I encountered a situation in the massive KPMG criminal case where the U.S. General Services
Administration is apparently considering disqualifying some of the defendants from entering some
types of government contracts. Final resolution is deferred pending the outcome of the criminal
litigation, but it could prove to be a problem even if the defendants in issue are acquitted in the
criminal case
VI.
Publicity / Press Releases.
The IRS has a policy allowing it to issue press releases regarding enforcement activity,
including criminal prosecutions and convictions. The policy is stated in Policy 1-1831069 which
states in part relevant to criminal prosecutions and convictions:
1068
1069
In the Matter of John J.P. Howley (Supreme Court, Appellate Division 12/17/2009).
IRM 1.2.19.1.9 Policy Statement 1-183 (Approved 05-23-1986).
- 445 -
(1) News coverage to advance deterrent value of enforcement activities encouraged:

The Service will endeavor to obtain news coverage of its enforcement activities in
order to: (a) help deter violations of the internal revenue laws, and (b) increase the
confidence of conscientious taxpayers that the Service prosecutes violators. In
achieving these goals, the Service will act with due regard for an individuals right
to a fair trial as set forth in the Attorney Generals guidelines, 28 CFR 50.2, as well
as the publics right to know. Accordingly, the Service will promote news coverage
of its enforcement activities in the following manner:
1. General information concerning the work of a particular division or
divisions involved may be furnished.
2. Information which is a matter of public record (such as pleadings filed
with the United States Tax Court or an indictment which has been made public) may
be supplied upon request.
3. In cases pending with a U.S. Attorney, the Service will cooperate with
him/her to obtain news coverage.
4. In strike force cases, the Service will cooperate with the on-site strike
force attorney to obtain news coverage.
5. All news releases concerning criminal actions will be submitted to the
U.S. Attorney for approval before distribution to the news media. News releases may
be prepared for attribution either to the U.S. Attorney, or for joint attribution to both
the Service and the U.S. Attorney. Jointly attributable news releases may be issued
on IRS masthead after clearance through the Disclosure Officer and the U.S.
Attorney, and may be distributed by Service officials. News releases which are
attributed only to the U.S. Attorney may be distributed by Service officials upon
request of the U.S. Attorney. Because of statutory prohibition on the disclosure of
tax information, it is imperative that material contained in news releases be limited
to facts that are a matter of public record.
6. Designated Service officials may participate in press conferences relating
to enforcement actions at the invitation of U.S. Attorneys.
DOJ Tax has a parallel publicity policy.1070 Indeed, although these are parallel policies, at
least in the context of criminal tax enforcement, the DOJ is the prime issuer of press releases.1071
I hope you can see the purpose of these news releases. As noted before, the IRS has limited
resources, particularly in the criminal enforcement area. So, as also noted, it must choose its targets
1070
CTM 3.00 (2008 ed.), Press Releases in Cases Involving the IRS.
See generally, Joshua D. Blank and Daniel Z. Levin, When is Tax Enforcement
Publicized?, 30 Va. Tax Rev. 1 (2010).
1071
- 446 -
well, must get a high conviction rate, and must make sure that the criminal enforcement actions are
publicized. A key element of the Governments publicity initiative is timing. It is common
knowledge that the IRS will have a disproportionate number of indictments in the tax season (the
Government can control timing of indictments) so that they be touted in the popular press to
encourage taxpayers to meet their pending tax obligations.1072
The Assistant Attorney General for the Tax Division recently discussed certain aspects of
the publicity policy as follows:
The IRS shoots for publicity in 80-85% of the cases. This means that potential
defendants who are not newsworthy individual or as part of a larger class (e.g.,
doctors and lawyers) have an even lesser chance of being prosecuted.
The publicity most commonly attends the indictment when the information that is
publicized is the number and nature of the charges and the maximum jail sentence
possible if the defendant is convicted of all charges and the sentences were stacked
on top of each other. For example, if the defendant is charged with four counts of
7201 evasion, since each count has a 5 year maximum sentence, the publicity
would state that the maximum sentence is 20 years. The Government imagines that
this type of information will strike fear into the hearts of all those who hear. Of
course, the ultimate actual sentence is usually far, far less because of the Sentencing
Guidelines and plea agreements. So the IRS is less likely to publicize the actual
conviction and sentencing, if any. And, of course, by focusing on the indictment, the
IRS can time the event and resulting publicity to hit just before the key filing dates
such as April 15.1073
You will thus need to caution your client that the IRS may publicize an indictment or
conviction. Most clients would prefer to keep their indictments and convictions confidential, so
your client must understand that publication may be a nonstatutory further punishment that may be
imposed in the IRSs zeal to publish and thereby encourage others to do right.
Plea agreements usually include a specific acknowledgment and agreement that the
Government may publicize the conviction.
One of the major controversies that has arisen is whether the IRS has breached other
obligations in its press releases in criminal matters. Section 6103 generally prohibits the IRS from
releasing taxpayer return information. Information the IRS gathers in its audit or criminal
investigation of a taxpayer is taxpayer return information generally prohibited from disclosure. Of
course, in order for DOJ to consider the taxpayer for criminal prosecution and DOJ thereafter to
prosecute the taxpayer in a tax case, the taxpayers return information has to be disclosed to DOJ
1072
Practitioners know this from observation. Scholars have marshaled sampling

techniques to verify the observation. See e.g., Joshua D. Blank and Daniel Z. Levin, When is Tax
Enforcement Publicized?, 30 Va. Tax Rev. 1 (2010).
1073
Paraphrased from Comments of Nathan Hochman, AAG Tax, to the Committee on
Civil and Criminal Tax Penalties at the ABA Tax Section May Meeting (5/10/08).
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and, as noted elsewhere, there are exceptions from the general prohibition on disclosure to permit
disclosures to DOJ and the courts.1074 If the taxpayer is prosecuted, of course, the return information
may be disclosed in the prosecution -- e.g., in the indictment, in the plea agreement if one is reached,
in the record at trial if the case is tried, and other documents filed of record in the criminal
proceeding.1075 But what if the IRS in making a press release upon conviction discloses information
from its files that was not part of the public record? The Courts generally hold that such disclosures
violate Section 6103. But, does it make a difference if the IRS pulls the information from the public
record in the criminal trial? Most courts hold that that is OK. Then, does it make a difference if the
IRS pulls the information from its files and the same information just happens to also be in the
public court record? Some courts approve that disclosure; others do not.1076
Because the various circuits may resolve the nuances of 6103's mandate to IRS press
releases, the IRS has to be cautious in the press releases that are so important to its criminal
enforcement strategy and has elaborate instructions about those press releases, including a
requirement that all releases only contain information available from public sources (including court
proceedings).1077
VII.
Contract Violations.
The taxpayer may have certain contractual obligations to third parties to comply or at least
not violate laws, including tax laws. In a one case,1078 a franchiser sought to revoke the franchise
of a franchisee based on violation of the tax laws. In that case, the franchisee had not even been
prosecuted for tax evasion. Instead, an anonymous informant advised the franchisee of the violation
of tax and employment laws. The tax violation was the charging of significant personal expenses
to the business, thereby underreporting the net business income and underpaying tax. The Court
found the owner had committed tax evasion, and also analyzed the case under 7206(1) (tax
perjury), finding that the misstatements (overstated expenses) were material. In sustaining the
termination of the franchise agreement, the Court also relied upon employment law violations. The
Court finally made the following finding:
The Defendants have not been convicted, indicted, fined or otherwise cited
by any governmental agency as a result of the Defendants' noncompliance with
federal income tax or employment laws. Moreover, the Plaintiffs have not shown that
any person, other than the parties and their representatives, are aware of the
1074
6103(h)(2) & (h)(4).

6103(h)(4).
1076
The cases in this area are well summarized in a study by the Joint Committee on
Taxation of Section 6103, titled Volume 1: Study of General Disclosure Provisions (1/28/2000), to
which I refer the reader.
1077
See IRM 9.3 Disclosure and Publicity.
1078
Dunkin' Donuts Inc. et al. v. Omar Martinez, et al. (S.D. Fla. 2003), unofficially
reported at 2003 TNT 151-12 (8/6/03); see also Dunkin Donuts Franchising LLC v. Oza Brothers,
Inc., 2012 U.S. Dist. LEXIS 140595 (ED MI 2012) (similarly finding that actions constituted
violations of 7201 and 7206(1) and thus permitted termination under the contract).
1075
- 448 -
Defendants' noncompliance with the federal laws or that Plaintiffs have lost any
customers or attracted any adverse public attention as a result of Defendants'
noncompliance with the federal laws.
The Court then allowed the franchisers to terminate. And, the public record fully available to the
IRS now alerts the IRS as to potential taxes and civil and criminal penalties from their conduct.1079
1079
See also Dunkin Donuts Franchised Restaurants LLC v. Strategic Venture Group,
Inc., 2010 U.S. Dist. LEXIS 119417 (D NJ 2010).
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CH. 5 - STATUTES OF LIMITATION

I.
Tax Crimes.
A.
Statute.
Sec. 6531. Periods of limitation on criminal prosecutions.

No person shall be prosecuted, tried, or punished for any of the various
offenses arising under the internal revenue laws unless the indictment is found or the
information instituted within 3 years next after the commission of the offense, except
that the period of limitation shall be 6 years-(1) for offenses involving the defrauding or attempting to defraud the United
States or any agency thereof, whether by conspiracy or not, and in any manner;
(2) for the offense of willfully attempting in any manner to evade or defeat
any tax or the payment thereof;
(3) for the offense of willfully aiding or assisting in, or procuring, counseling,
or advising, the preparation or presentation under, or in connection with any matter
arising under, the internal revenue laws, of a false or fraudulent return, affidavit,
claim, or document (whether or not such falsity or fraud is with the knowledge or
consent of the person authorized or required to present such return, affidavit, claim,
or document);
(4) for the offense of willfully failing to pay any tax, or make any return
(other than a return required under authority of part III of subchapter A of chapter
61) at the time or times required by law or regulations;
(5) for offenses described in sections 7206(1) and 7207 (relating to false
statements and fraudulent documents);
(6) for the offense described in section 7212(a) (relating to intimidation of
officers and employees of the United States);
(7) for offenses described in section 7214(a) committed by officers and
employees of the United States; and
(8) for offenses arising under section 371 of Title 18 of the United States
Code, where the object of the conspiracy is to attempt in any manner to evade or
defeat any tax or the payment thereof.
The time during which the person committing any of the various offenses arising under the
internal revenue laws is outside the United States or is a fugitive from justice within the meaning
of section 3290 of Title 18 of the United States Code, shall not be taken as any part of the time
limited by law for the commencement of such proceedings. * * * *.
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B.
Materials.
1.
General Statute of Limitations Concepts.
Federal crimes have statutes of limitations. The defense, if meritorious, bars the prosecution
of the crime. The defense is raised in a pretrial motion under Rule 12, FRCrP, or, at the latest, at
trial. However, a defendant may waive the defense either by a knowing voluntary waiver or, since
it is an affirmative defense, by failure to assert the defense timely.1080
2.
The Statutes.
Although the general rule under 6531 is that the statute of limitations is three years for tax
crimes, the exceptions imposing a six year statute of limitations carve out the more significant tax
crimes as follows:1081
Tax evasion ( 7201) - subsection (2).
Tax perjury (7206(1)) and submitting false documents (7207) - subsection (5).
Aiding and assisting (7206(2)) - subsection (3).1082
Attempts to interfere ( 7212, including the Omnibus Clause) - subsection (6).1083
Failure to pay over withheld taxes ( 7202) - subsection (4).1084
Failure to file a return - subsection (4).
1080
See United States v Ramirez, 324 F.3d 1225 (11th Cir. 2003) (holding that, where the
facts related to the statute of limitations defense are not undisputed, the defense can be raised at trial
to resolve the disputed facts but that, where the facts related to the defense are undisputed from the
face of the indictment, the defense is waived if not raised in a pretrial motion under Rule 12.
1081
For a good summary in this area, see also Steven M. Harris, Statute of Limitations
Primer: Tax and Related Title 18 Prosecutions, 2005 TNT 40-68.
1082
See United States v. Hayes, 322 F.3d 792 (4th Cir. 2003) for a good analysis of the
application of the exception for 7206(2) charges although the wording of the two sections is not
exactly the same.
1083
6531(6) provides a six year statute of limitations for the offense described in
section 7212(a) (relating to intimidation of officers and employees). You will recall that 7212(a)
has two branches the first for intimidation of Government officers and employees and the second,
called an Omnibus Clause, for general attempts to impede the lawful functioning of the IRS. The
parenthetical in 6531(6) could be read to limit its application to the first branch, but Courts have
not bought into that limitation. See United States v. Kassouf, 144 F.3d 952, 959 (6th Cir. 1998);
United States v. Wilson, 118 F.3d 228, 236 (4th Cir. 1997); United States v. Workinger, 90 F.3d
1409, 1414 (9th Cir. 1996); and United States v. Kelly, 147 F.3d 172, 177 (2d Cir. 1998).
1084
United States v. Blanchard, 618 F.3d 562 (6th Cir. 2010) (collecting and analyzing
the cases). The defendants argument was that the statutory text uses the term pay and not pay
over which is the term of art for trust fund withholding taxes covered in 7202. The Blanchard
court found the meaning of the text to cover 7202 to be plain (or at least plain enough for the
court), but also found context support to make that the better reading of the statute of limitations
text.
- 451 -
The Title 18 crimes that are frequent traveling mates of tax crimes normally have a five year
statute of limitations.1085 However, 6531 commands that conspiracy under 18 U.S.C., 371 to
commit tax evasion or to a defraud (Klein) conspiracy) have a six year statute of limitations.1086
Note a conspiracy that is neither Klein conspiracy or an evasion offense conspiracy retain the five
year statute of limitations. Whatever benefit that might be perceived here is probably illusory
because virtually any offense conspiracy has as its object the defrauding of the United States, as the
term defraud is expansively imagined by the Government. (See the previous discussion of the
defraud conspiracy.)
3.
Affirmative Acts in Tax Evasion.
Beacon Brass (supra, p. 38) illustrates how the statute of limitations gets refreshed by
affirmative acts during the audit within the statute of limitations where the tax return was filed and
the original criminal exposure arose outside the statute of limitations. For example, assume the
taxpayer files a return for year 1 on April 15 of year 2, and, during the IRS audit of the year 1 return
in September of year 3, the taxpayer lies in order to cover up the fraudulent return. Beacon Brass
holds that the Government has until September 1 of year 9 (six years from the affirmative act) to
bring criminal prosecution for evasion as to the year 1 taxes. (Of course, as discussed in Beacon
Brass, the Government could prosecute the lie under 18 U.S.C. 1001, but would have only a 5 year
statute until September 1 of year 8 to do so.)
Taking this analysis to the extreme, consider the following facts: The taxpayer commits tax
evasion in year 1 with respect to amounts that he deposits into a foreign bank account. The taxpayer
files his year 1 return on April 15 of year 2. In that return, consistent with his failure to include the
income on the return, the taxpayer fails to answer the foreign bank account question on Schedule
B. In later years (years 2 through 5), the taxpayer maintains the foreign bank account and, in his
returns for those years, also fails to answer the foreign bank account question. Is the taxpayers
failure to respond properly to the foreign bank account question a series of actions designed to hide
the original fraudulent return (year 1 return), so that the last such act in the year 5 return is the last
evasive act from the which statute of limitations on year 1 can be measured.)? One court has
answered the question yes.1087 Of course, the IRS could have prosecuted the taxpayer under
7206(1) for the later year returns which obviously were false (through failure to respond) and the
statute would have been open for them. But the IRS chose instead to prosecute for the earlier year
by relying on the later year returns as subsequent evasive acts with respect to year 1.1088
1085
1086
18 U.S.C. 3282, quoted below.

See 6531(8) for a offense conspiracy to evade and 6531(1) for the Klein
conspiracy.
1087
United States v. Anderson, 319 F.3d 1218 (10th Cir. 2003).

1088
The scope of the holding is significant indeed, because in many, if not most cases
where taxable income is diverted to an offshore bank account, the taxpayers will either fail to answer
to foreign bank account question (as well as fail to include the bank account earnings) on the later
year returns and those would both be independent criminal acts (under 7201 and 7206(1) for the
later years but as subsequent evasive acts for all of the earlier years. The author, for example, has
had clients who have had foreign bank accounts for 20 years and have either failed to respond or
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What happens where the affirmative act required element for tax evasion occurs outside the
period of limitations but the taxes and tax return affected is within the period of limitations? In,
United States v. King,1089 the taxpayer was a tax protestor whose methodology of protest was to file
false W-4's claiming too many exemptions. An employer receiving suspicious W-4's is required to
notify the IRS. If the IRS has reason to believe that the Form W-4's are incorrect, the IRS can direct
the employer not to honor the W-4's. The taxpayer filed two such Form W-4's, the employer notified
the IRS, the IRS directed the employer not to honor it, and the employer complied with the IRSs
direction. Thereafter, in 1987, however, the IRS did not direct the employer to not honor the W-4's
and the employer therefore honored them and continued to do so for several years thereafter. The
taxpayer did not file a tax return for any year after his first W-4 filing. The IRS brought an
indictment charging violations of Section 7201 (attempt to evade) for the years 1989 through 1991.
The indictments were returned more than six years after 1987, but within six years of 1989.
The taxpayer urged first that a tax evasion charge could not be based upon a false W-4
which, by its terms, had expired. The taxpayer referred to the Regulations which said that a Form
W-4 expires on February 15 after the year in which it is filed, even though some employers like the
taxpayers employer in practice continue to honor a W-4 until a superseding one is filed. The Court
rejected the argument that the false W-4 could not form a basis for indictment because it had
technically expired, reasoning:
If a defendant files a Form W-4 in which he falsely claims to be exempt from
withholding, and he keeps the fraudulent form on file indefinitely, all the while
believing that his employer will honor it until he files a new one, it is only logical
that the fraudulent W-4 may supply the affirmative act for 7201 charges in later
years, regardless of the fact that it technically expired pursuant to Treasury
regulations. Maintaining a Form W-4 on file with ones employer effectively
represents that one is still entitled to the number of allowances or exempt status
claimed. If the form is false, the form certainly has the capacity to deceive for as long
as it is kept on file. In this case, the fact that Delco failed to compel King to file a
new W-4 each year, as requested by the IRS, in no way mitigates Kings 7201
liability. To find otherwise would be to allow the negligence of an employer to
accrue to the benefit of an employee who has contravened the law in the first place
by filing a false and fraudulent Form W-4. It would be inappropriate for us to
judicially sanction a tax loophole like that.
The taxpayer next argued that the required affirmative act (remember the discussion of
Section 7201) -- here the filing of the false W-4 -- must have occurred within the six year statute of
limitations in order to support timely criminal prosecution. (In Beacon Brass, for example, an
affirmative act of lying during the audit occurred within the six year period.) The Government
responded negatively to the foreign bank account question on all subsequent returns. If such
accounts have material amounts of income that go untaxed (as is frequently the case), each of the
earlier years arguably remains open for six years from the last year that the taxpayer files a return
without correct answers to the foreign bank account question.
1089
126 F.3d 987 (7th Cir. 1997).
- 453 -
alleged in the indictment that that the act of evasion occurred on the due date of the returns for the
years 1989 through 1991 (referred to as the offense dates). Yet, the taxpayer urged, no affirmative
conduct then occurred, on the notion that the failure to file is not affirmative conduct. The Court
reasoned:
This argument is unavailing. The indictment properly alleged that Kings offenses
occurred on the due dates of his returns for the prosecution years. A 7201 offense
is not complete until a tax deficiency exists, and a deficiency will not arise until the
due date of a tax return. * * * * And, as we will discuss below, the act of filing and
maintaining on file a false Form W-4 carries over to future years if the defendant
files with the requisite intent to evade taxes.
The Court, of course, faced a conundrum. The taxpayer could not have been charged with intent to
evade 1989-1993 taxes on the date he committed the affirmative act -- the filing of the false W-4 in
1987. There was then no offense for the indicted years. Hence, it was compelled to hold that the
offense did not occur until the returns for the indicted years were due, although the Spies affirmative
act required to support a 7201 charge for tax evasion had occurred outside the required limitations
period.
In a similar analysis, the Court in United States v. Kassouf,1090 held that a net operating loss
falsely claimed on a return that was outside the 6 year statute of limitations but carried forward to
a year within the statute of limitations could support a criminal charge. The intent of the original
act (overstating the net operating loss) was to claim tax benefits in other years and thus the wrongful
claiming of a tax carryforward in the later year was criminal.1091
4.
Event that Starts Statute Running.

a.
General.
Statutes of limitation commence upon the occurrence of all the elements of the offense i.e.,
when the crime is complete.
b.
Tax Crimes Related to a Filed Return.
In cases where the filing of a return (such as tax evasion and tax perjury) is the key event,
the filing occurs normally when the IRS receives the return. The receipt and filing normally
commences the statute of limitations for a crime arising from conduct related to the return (e.g., tax
evasion of assessment by filing a false return or tax perjury for statements made on a return). There
are some nuances to this general statement which I illustrate in the following examples:
Example 1: Taxpayer, an individual, mails his year 1 return to IRS Service Center on
February 1 of year 2 and the Service Center receives it on February 4 of year 2. Section 6501(b)(1)
1090
1091
959 F. Supp. 450 (N.D. Ohio 1997), affd 144 F.3d 952 (6th Cir. 1998).
See also United States v. Carlson, 235 F.3d 466 (9th Cir. 2000).
- 454 -
deems the return to be filed on April 15 of year 2, the due date of the return. The statute for both
civil and criminal purposes runs from April 15 of year 2.
Example 2: Taxpayer mails the year 1 return to the IRS Service Center of April 14 of year
2 and the Service center receives it on April 19 of year 2. Under the timely mailing, timely filing
rule of 7502, the return is deemed filed on the date of mailing (April 14 of year 2); since April 14
is prior to the due date of the return, the return is deemed filed on the due date (April 15 of year 2).
The statute for both civil and criminal purposes runs from April 15 of year 2.
Example 3: Taxpayer obtains extensions permitting him to file the return on or before
October 15 of year 2. Taxpayer mails the return to the IRS on September 1 of year 2, and the IRS
Service Center receives the return on September 4 of year 2. The return is filed on and the civil and
criminal statutes of limitations run from September 4 of year 2.1092
Example 4: Taxpayer obtains extensions permitting him to file the return on or before
October 15 of year 2. Taxpayer mails the return to the IRS on October 14 of year 2, and the IRS
Service Center receives the return on October 17 of year 2. Under the timely mailing, timely filing
rule, the return is deemed filed on October 14 of year 2, and the civil and criminal statute runs from
that date. (Note that the rule that treats an early filed return applies only to the original due date and
not the extended due date, so the return deemed filed on October 14 of year 2 is not deemed filed
on the extended due date of October 15 of year 2.)
However, even with respect to evasion involving the filing of a false return, a subsequent
affirmative act to effect the evasion can start the statute running afresh. We saw that in Beacon
Brass, above. Where, as in Beacon Brass,1093 the subsequent affirmative act was a false or
misleading statement subject to prosecution under 18 U.S.C. 1001, the Government can prosecute
either under 1001 which has a five year statute of limitations or under 7201 which has a six year
statute of limitations.
A charge under 7206(2) for assisting in the presentation of a false document (such as a
return) to the IRS often relates to conduct done before the presentation to or filing with the IRS. For
example, a return preparer may prepare a false year 1 return on April 1 of year 2 and the taxpayer
not file it until April 10 of year 2 (or even later), the statute of limitations should not commence until
the filing where the presentation to the IRS is an element of the offense.1094
1092
United States v. Habig, 390 U.S. 222 (1968).

See also United States v. Ferris, 807 F.2d 269 (1st Cir. 1986), cert. denied, 480 U.S.
950 (1987); and United States v. Goodyear, 649 F.2d 226 (4th Cir. 1981).
1094
See United States v. Dahlstrom, 713 F.2d 1423, 1428-1429 (9th Cir. 1983) (holding
that, in the context of a false return, the filing of a return is in fact an element of a section 7206(2)
violation; and basing the holding on the reasoning from the language of United States v. Habig, 390
U.S. 222 (1968)). Note, however, that 7206(2) may apply to situations where the false document
itself is not presented to the IRS but backs up a return position that is thereby rendered false. See
United States v. Crum, 529 F.2d 1380 (9th Cir. 1976). Query: Given the language of the statute,
when does the statute begin running?
1093
- 455 -
c.
Failure to File.
In cases where the crime is a failure to do an act commanded by the statute (failure to file
a return being the most obvious here), the act is deemed to occur on the last date required for the act.
In the case of an individual failing to file his or her individual income tax return, the last day is April
15.
5.
Suspension and Tolling.
Several events can suspend the running of the statute of limitations for tax crimes. Note the
following:
The civil and criminal statutes of limitations are suspended: (i) if the taxpayer brings
or participates in a proceeding to quash the summons, the statute is suspended during
the period the proceeding is pending;1095 or (ii) if the third party summonsee,
including a John Doe summonsee, fails to respond properly, the statute is suspended
during the period beginning on the date six-months after the summons is issued and
ending on the date of final resolution of such response.1096
The statute of limitations is suspended during a so-called Due Process Proceeding

when there are limitations upon the IRSs ability to investigate or collect.1097
18 U.S.C. 3292 may permit the Government unilaterally to toll the statute of
limitations by making an official request for foreign records relevant to the crimes
being investigated by a grand jury.1098 I discuss this below.
Tolling By Absence from Country or Fugitive Status.
Tax Crimes & Conspiracies. For the tax crimes created in the Internal
Revenue Code and for conspiracies related to tax both offense conspiracies
and Klein defraud conspiracies where the statute of limitations is
determined in 6531, the statute is tolled while the defendant is outside the
1095
7609(e)(1).
7609(e)(2). A John Doe summonsee is required to notify the ultimate taxpayer(s)
the John Doe(s) of the statute suspension. 7609(i)(4). The dates on which the suspension
begins and ends are illustrated in IRM 25.5.6.6.3.2 (04-21-2009), titled Suspension of the Periods
of Limitation When a Summoned Third Party Fails to Fully Comply for 6 Months After Service
With a Summons and IRM 25.5.6.6.3.3 (04-21-2009), titled Determination of Final Resolution.
Since the IRM provides internal guidance for IRS personnel, it is not likely that these illustrations
are entitled to deference. Also, for analogous provision suspending the statute of limitations pending
compliance with a treaty request, see 28 U.S.C. Section 3293, discussed below.
1097
6330(c), (d) and (e) and 6320(c).
1098
See United States v. Neill, 940 F. Supp. 332 (D.C.C. 1996) and earlier decision,
United States v. Neill, 952 F. Supp. 831 (D.D.C. 1996).
1096
- 456 -
United States or a fugitive from justice within the meaning of 18 U.S.C.

3290.1099 Tolling is in the disjunctive.
Absence. The defendants mere absence from the United States tolls
the statute.1100 For example, a defendants eleven-day health and
pleasure trip to Switzerland tolled the statute of limitations under 26
U.S.C. 6531.1101
Fugitive. Section 3290 defines fugitive as any person fleeing from

justice. The majority rule is that intent to avoid arrest or
prosecution must be proved for 3290's fugitive definition to apply;
the minority rule is that mere absence from the jurisdiction,
regardless of intent, is sufficient.1102 As noted, of course, the
disjunctive provision in 6531 tolls the statute upon mere absence
from the country regardless of fugitive status under 3290.
For Other Crimes. For other tax related Title 18 crimes where the statute of
limitations is determined in Title 18 (e.g., false statements to an agent) rather
than 6531, the statute of limitations is tolled only if the defendant is a
fugitive as defined in 3290. As noted, intent for the absence is critical
under the majority rule.
The statute is tolled while an indictment is under seal.1103
The statute is effectively tolled for 9 months by the Government filing a

complaint.1104 This device is a limited one to be used in exigent circumstances, and
not as a general way to extend the statute in all cases.1105
1099
6531 (flush language).

CTM 7.03 (2008 ed.).
1101
United States v. Marchant, 774 F.2d 888, 892 (8th Cir. 1985).
1102
CTM 7.03 (2008 ed.).
1103
E.g., United States v Edwards, 777 F.2d 644 (11th Cir. 1985), cert den. 475 US 1123
(1986); United States v Sharpe, 995 F.2d 49 (5th Cir. 1993), cert den. 510 US 885 (1993) and cert
den 510 US 1002 (1993). The cases do use the word toll to describe the effect of the filing of the
sealed indictment on the statute of limitations. While I have not fully researched, I just state my
skepticism as to whether the statute of limitations is tolled at least in the normal meaning of the
concept of tolling to suspend the statute of limitations. For example, if a sealed indictment is
brought one month before the statute would have otherwise expired, and is then unsealed one month
after the statute would have otherwise expired, does that mean that the statute then has one month
left to run (meaning that a new indictment can be brought in that period)? Or is the sealed
indictment timely because it was filed during the applicable statute of limitations, so that any
subsequent indictment must be tested under the superseding indictment rules.
1104
6531.
1105
CTM 7.04 (2008 ed.).
1100
- 457 -
If a timely indictment is dismissed after expiration of the statute of limitations for a

reason other that one that bars later prosecution, a new indictment or information
may be brought within six months of the dismissal.1106
One problem of uncertain scope is the Wartime Suspension of Limitations Act ("WSLA"),
18 U.S.C. 3287. The statute provides in relevant part:
When the United States is at war or Congress has enacted a specific authorization for
the use of the Armed Forces, as described in section 5(b) of the War Powers
Resolution (50 U.S.C. 1544 (b)), the running of any statute of limitations applicable
to any offense
(1) involving fraud or attempted fraud against the United States or any
agency thereof in any manner, whether by conspiracy or not,
****
shall be suspended until 5 years after the termination of hostilities as proclaimed by
a Presidential proclamation, with notice to Congress, or by a concurrent resolution
of Congress.
Subsection (1) is worded very broadly and is not limited to fraud that relates to any hostility
authorized by declaration of war or congressional resolution. Specifically, the Iraqi and Afghanistan
engagements have been authorized but have not been terminated in the form textually prescribed the
by statute.1107 Does that mean that all frauds including tax fraud crimes now have their statutes
of limitations suspended?1108
6.
Continuing Offense.
As should be apparent from the above, for tax crimes, the facts should present a recognizable
start date for the statute of limitations. However, some offenses may be deemed continuing offenses
in which a start date may be hard to identify. The continuing offense doctrine may apply to push
the statute forward.1109 The doctrine, based on statutory construction, applies only where the
explicit language of the substantive criminal statute compels such a conclusion, or the nature of the
1106
18 U.S.C. 3288. As with superseding indictments discussed elsewhere in the text,

the subsequent otherwise untimely indictment may not broaden or substantially enlarge the charges
of the original indictment. United States v. McMillan, 600 F.3d 434, 444 (5th Cir. 2010), citing
United States v. Italiano, 894 F.2d 1280, 1283 (11th Cir. 1990).
1107
United States v. Pflueger, ___ F.3d ___, 2012 U.S. App. LEXIS 12665 (5th Cir.
2012) (these engagements are still open, thereby suspending the statutes); and United States v.
Prosperi, 573 F. Supp. 2d 436 (D. Mass. 2008) (the engagements were effectively terminated earlier
although not in the textually prescribed manner; Pflueger rejects Prosperi's reasoning).
1108
I ask this question but cannot answer it in blogs on my Federal Tax Crimes. See
http://www.federaltaxcrimes.blogspot.com/search/label/18%20USC%203287.
1109
See Toussie v. United States, 397 U.S. 112, 115 (1970).
- 458 -
crime involved is such that Congress must assuredly have intended that it be treated as a continuing
one.1110
Tax crimes are not crimes that are inherently continuing offenses for this purpose,1111 but
they can be under certain circumstances. For example, as we have seen, the statute of limitations
on evasion of assessment by filing a fraudulent return would generally start on the date the return
was filed.1112 But, as we have seen, the start date can be later if some further act in furtherance of
the evasion occurs such as making false statements to an IRS Agent in a later audit.
Tax obstruction often involves multiple acts, sometimes over longer periods of time, that are
part of a single continuing scheme. The Government may charge a tax obstruction scheme to be a
continuing offense so that a charge for a single count of tax obstruction may be brought that
encompasses events beyond the statute of limitations period so long as some material (sometimes
called integral) act in the scheme occurs within the statute of limitations.1113 In this respect, the
material act within the statute of limitations period refreshes the statute of limitations in much the
same way that the lie during the audit in Beacon Brass set a new statute of limitations on evasion
of assessment where the filing of the return was well beyond the statute of limitations.
Also, the Title 18 offenses that frequently travel along with tax crimes may be continuing
offenses.1114 We now turn to Title 18.
II.
Title 18 Offenses.
A.
Statute.
Sec. 3282. Offenses not capital

Except as otherwise expressly provided by law, no person shall be
prosecuted, tried, or punished for any offense, not capital, unless the indictment is
found or the information is instituted within five years next after such offense shall
have been committed.
1110
Toussie, 397 U.S. at 115.

E.g., United States v. Payne, 978 F.2d 1177 (10th Cir. 1992); but see Shorter v.
United States, 608 F.Supp. 871 (D.D.C. 1985), aff'd, 809 F.2d 54 (D.C. Cir. 1987).
1112
United States v. Beacon Brass Co., Inc., 344 U.S. 43 (1952); cf. United States v.
Barker, 556 F.3d 682 (8th Cir. 2009) (applying the concept in applying the sentencing issue of which
version of the Sentencing Guidelines to use).
1113
See United States v. Daugerdas, 2011 U.S. Dist. LEXIS 14912 (SD NY 2011), citing
United States v. Toliver, 972 F. Supp. 1030, 1038 (W.D. Va. 1997) which, indeed, so held.
1114
For an egregious attempt by the Government to turn what was a tax crime into a
continuing offense by charging it under 1001(a)(1), see United States v. Mubayyid, 567 F.Supp.
3d 223 (D. MA 2008).
1111
- 459 -
B.
Materials.
1.
Conspiracies.
a.
General.
You will recall from reading the tax statute of limitations above that subsection (8) provides
for a six year statute of limitations for offenses arising under section 371 of Title 18 of the United
States Code, where the object of the conspiracy is to attempt in any manner to evade or defeat any
tax or the payment thereof. In Ingredient Technology, the Court applied subsection (8). You will
further recall that 6531(1) applies to Klein conspiracies.
However, where the Internal Revenue Code does not provide a statute of limitations, the
conspiracy to violate a tax provision will carry the normal five-year statute under 3282.1115
The statute of limitations in a conspiracy begins to run from the last overt act proved.1116
Any member of the conspiracy can commit the last overt act and it is charged to all of the
members.1117 Once the government shows a member joined the conspiracy, their continued
participation in the conspiracy is presumed until the object of the conspiracy has been achieved.1118
However, if a defendant withdrew from the conspiracy outside the period of limitations, he will not
be charged with any overt act of a conspirator during the statute of limitations.1119
b.
Crime Outside Statute; Overt Act Within.
The traditional statement of the statute of limitations in a conspiracy situation is as follows:

For a conspiracy charge that requires proof of overt acts to be within the statute of
limitations, the (1) conspiracy must still have been ongoing within the five year
period preceding the indictment, and (2) at least one overt act in furtherance of the
conspiratorial agreement [must have been] performed within that period. Grunewald
v. United States, 353 U.S. 391, 396-97 (1957) (The crucial question in determining
whether the statute of limitations has run is the scope of the conspiratorial agreement,
for it is that which determines both the duration of the conspiracy, and whether the
act relied on as an overt act may properly be regarded as in furtherance of the
1115
See United States v. Ely, 140 F.3d 1089 (5th Cir. 1998).
Grunewald v. United States, 353 U.S. 391, 397 (1957); see United States v. Bellomo,
176 F.3d 580, 598 (2d Cir. 1999). For an interesting application of this rule (and cautionary tale for
contingency litigators who attempt alchemy with respect to their contingency fees) see United States
v. Molaisen, 2005 U.S. Dist. LEXIS 2224 (E.D. La. 2005).
1117
Hyde v. United States, 225 U.S. 347, 369-70 (1912); see also United States v. Read,
658 F.2d 1225, 1234 (7th Cir. 1981) (interpreting the Hyde).
1118
See, e.g., United States v. Juodakis, 834 F.2d 1099, 1103 (1st Cir. 1987); United
States v. Barsanti, 943 F.2d 428, 437 (4th Cir. 1991), cert. denied, 112 S. Ct. 1474 (1992).
1119
See Read, supra, 658 F.2d at 1233.
1116
- 460 -
conspiracy.); see Brown v. Elliott, 225 U.S. 392, 401 (1912) ([In the case of an
alleged conspiracy,] the period of limitations must be computed from the date of the
last [overt act] of which there is an appropriate allegation and proof. (internal
quotation marks omitted)); see also United States v. Davis, 533 F.2d 921, 929 (5th
Cir. 1976).1120
This traditional statement of the rule covers the situation where the overt act occurs after the crime
itself. I discuss below the situation where the overt act occurs outside the statute of limitations but
before the commission of the crime.
In order for the overt act to count in the statute of limitations determination, the overt act
must be in furtherance of the conspiracy. In Grunewald v. United States,1121 the Supreme Court said
that the crucial question in determining whether the statute of limitations has run is the scope of
the conspiratorial agreement, for it is that which determines both the duration of the conspiracy, and
whether the act relied on as an overt act may properly be regarded as in furtherance of the
conspiracy. Thus, an act that is not in furtherance of a conspiracy but which seeks to cover up a
completed conspiracy does not refresh the statute of limitations.1122 Of course, if the object of the
initial conspiracy was to conceal the conduct in question, then the initial conspiracy carries through
the acts in furtherance of that object. If this were not the case, the holding that conspirators are
bound by the acts of the co-conspirators would keep the statute of limitations open indefinitely
through the unilateral and unanticipated acts of any of the co-conspirators.
These concepts are usually fairly straightforward in a tax prosecution but become particularly
dicey in a money laundering prosecution. Lets say that two shareholders of a corporation conspire
to commit tax evasion by diverting corporate income to their personal benefit without reporting
either the income to the corporation or the income (dividends) at the personal level. All of those acts
(including the tax returns involved) were done beyond the six year period for tax crimes and
conspiracies to commit tax crimes. Merely because they thereafter use the money thus diverted to
purchase assets within the statute of limitations should not refresh the statute on the original
conspiracy. But, by contrast, what if the crime involved money laundering under 1956? Then,
the use of the money after the original crime was committed is the precise object at which the crime
is targeted and thus a conspiracy to violate 1956 would perforce have as an object the use of the
proceeds. But, does that mean that every monetary transaction thereafter undertaken with proceeds
traceable to the initial crime is covered?
1120
1121
1122
United States v. Ben Zvi, 242 F.3d 89 (2d Cir. 2001).

353 U.S. 391, 397 (1957).
See Grunewald v. United States, 353 U.S. 391, 401-2 (1957), affirming its prior cases
holding that:
after the central criminal purposes of a conspiracy have been attained, a subsidiary
conspiracy to conceal may not be implied from circumstantial evidence showing
merely that the conspiracy was kept a secret and that the conspirators took care to
cover up their crime in order to escape detection and punishment.
- 461 -
The Second Circuit addressed this issue in United States v. LaSpina1123 as follows:
[Defendant] argues persuasively that construing the conspiracy to continue
as long as one conspirator engages in any monetary transactions involving the
criminally derived property, irrespective of whether the transactions are intended to
further the initial aims of the conspiracy, results in an indeterminate extension of the
statute of limitations. The Supreme Court has warned that it views with disfavor
attempts to broaden the already pervasive and wide-sweeping nets of conspiracy
prosecutions. Grunewald, 353 U.S. at 404. The Court has further instructed that in
determining whether the statute of limitations has run, we should analyze the
scope of the conspiratorial agreement, for it is that which determines both the
duration of the conspiracy, and whether the act relied on as an overt act may properly
be regarded as in furtherance of the conspiracy. Id. at 397. Accordingly, the
conspirators purpose or intent informs the scope of the conspiracy. Otherwise, a
conspiracy knowingly to engage in monetary transactions in criminally derived
property, 18 U.S.C. 1957(a), would be an indefinitely continuing offense with
an indeterminate statute of limitations, Krulewitch v. United States, 336 U.S. 440,
456 (1949) (Jackson, J., concurring).
The government argues that our holding in United States v. Monaco, 194
F.3d 381 (2d Cir. 1999), supports the proposition that the scope of a conspiracy
includes any transaction involving the criminally derived property. We disagree. In
Monaco, we noted that a conspiracy to launder proceeds from drug trafficking and
piracy was within the statute of limitations even though the monetary transactions
in furtherance of the laundering conspiracy were made as many as twelve years after
the drug trafficking and piracy ended. Id., 194 F.3d at 387 n.2. The Monaco
defendants continued until then to commit acts in furtherance of their conspiracy to
conceal or disguise the nature, the location, the source, the ownership, or the control
of the proceeds of specified unlawful activity, id. at 386 (quoting 18 U.S.C.
1956(a)(1)(B)(I)), viz., drug trafficking and piracy. Contrary to the governments
reading of Monaco, the monetary transactions were not deemed to be within the
scope of the conspiracy simply because they involved the drug trafficking and piracy
proceeds. The transactions were deemed part of the conspiracy because they
furthered the original aims of the conspiracy, to conceal and disguise the
nature, source, the ownership or control of the proceeds. Monaco, therefore, like
Krulewitch and Grunewald, analyzed the aims of the conspiracy to determine
whether a specific act fell within its scope.
But we disagree with [Defendants] alternative and unduly narrow
characterization of the scope of the conspiracy as limited to putting [Defendants]
share of the Cerplex proceeds into his control. Where the object of a conspiracy is
economic, the conspiracy generally continues until the conspirators receive their
anticipated economic benefits. United States v. Mennuti, 679 F.2d 1032, 1035 (2d
1123
299 F.3d 165, 174- (2d Cir. 2002).
- 462 -
Cir. 1982); accord id. at 1035-36 (collecting cases for the same proposition). If the
conspirators received their anticipated economic benefits after placing [Defendants]
share of the proceeds within his control, then that placement did not end the
conspiracy.
The Court then held on a facts and analysis argument that the benefits of the conspiracy were
realized within the applicable statute (a 5 year statute for money laundering).
c.
Overt Act Outside Statute and Crime Within.
What is the result if the crime occurs within the statute but the last overt act was committed
outside the statute? Courts treat the matter as definitional, just simply defining the ultimate crime
in a monetary setting, achieving the intended illegal economic benefit as an overt act.1124 (We
will see a variation of this concept outside the context of conspiracy in the analogous requirement
for tax evasion that there be an affirmative act.) If, however, the conspiracy is separate from the
crime, it seems that it would logically follow that it is the last overt act in the conspiracy that should
set the statute of limitations.
2.
Additional Materials on Tolling.

a.
Summons.
Section 7609(e) provides for tolling of the statute in certain cases where there is not timely
compliance with an IRS administrative summons. If the taxpayer files a motion to quash or
intervenes in a summons enforcement proceeding, the statute is tolled during the period of the
proceeding and any appeals.1125 Tolling also occurs in the case of the issuance of any IRS
administrative summons with no resolution as to the summonsed partys compliance therewith; in
that case, the statute is tolled from six months after the date of the summons until the partys
compliance therewith is resolved.1126
b.
Foreign Country Evidence.
In a world where international commerce, often of the illegal sort and often assisting tax
fraud, is increasing exponentially, key evidence may be overseas. Because long delays may be
1124
In United States v. Ben Zvi, 242 F.3d 89, 98 (2d Cir. 2001).:
A portion of these payments were made to Josi Jewelry, and thus represented
anticipated economic benefits of the conspirators, see United States v. Mennuti, 679
F.2d 1032, 1035 (2d Cir. 1982) (conspiracy continues until the conspirators receive
their anticipated economic benefits); see also United States v. Fletcher, 928 F.2d
495, 500 (2d Cir. 1991), the knowing receipt of which by the defendant and her
co-conspirators constituted overt acts in furtherance of the conspiracy, see United
States v. Girard, 744 F.2d 1170, 1173-74 (5th Cir. 1984).
1125
7609(e)(1).
1126
7609(e)(2).
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encountered in gathering foreign evidence, 18 U.S.C. 3292 in some cases permits the statute of
limitations to be suspended during the period between the U.S. request for foreign evidence and the
production of that evidence by the foreign authority. The key elements for this tolling are:
There must be a grand jury investigation.1127

Incident to the investigation, a request for information must be made to a foreign
jurisdiction before the return of an indictment.1128 The request must be an official
request, defined as a letter rogatory, a request under a treaty or convention, or any
other request for evidence made by a court of the United States or an authority of the
United States having criminal law enforcement responsibility, to a court or other
authority of a foreign country.1129 I cover below in the text various of these methods
for making a request to a foreign country. In the tax context, perhaps the principal
form of the request would be under the double tax treaty, which was one of the
devices used in the UBS grand jury investigation to flush out information about UBS
depositors. Effectively, what I call a John Doe request was submitted to the Swiss
tax administrators for information and documents related to U.S. taxpayers meeting
certain criteria.
That request to the foreign authority must be made within the otherwise applicable
statute of limitations.1130
The Government must apply to the district court.1131 There is conflict in the circuits
as to whether this application must be filed before the normal statute of limitations
expires.1132
1127
3292(d). I discuss below in the text international evidence gathering techniques,

including the techniques that qualify as an official request under 3292. For a good summary and
critique of 3292, see Abramovsky & Edelstein, Time for Final Action on 18 U.S.C. 3292, 21
Mich. J. Intl L. 941 (2000).
1128
3292(a)(1).
1129
3292(d). I discuss below in the text international evidence gathering techniques,
including the techniques that qualify as an official request under 3292. For a good summary and
critique of 3292, see Abramovsky & Edelstein, Time for Final Action on 18 U.S.C. 3292, 21
Mich. J. Intl L. 941 (2000).
1130
This is implicit in the statute because all it does is suspend the running of the statute.
Hence, if the statute has already expired, perforce a suspension is moot.
1131
3292(a)(1). In United States v. Broughton, 689 F.3d 1260, ___ (11th Cir. 2012),
the Court said that a "plain reading" of the statute limited the district court's decision so suspend to
two considerations: 1) whether an official request was made; and 2) whether that official request
was made for evidence that reasonably appears to be in the country to which the request was made.
If both those considerations are met, the statute of limitations shall be suspended. As I note
above, the elements required and their effects are more than these two, but in terms of the district
courts exercise of its power, these two are all that are required.
1132
Cases holding that the application can be filed after the statute of limitations has
otherwise expired: Jenkins v. United States, 633 F.3d 788 (9th Cir. 2011) and United States v.
Hoffecker, 530 F.3d 137, 163 n.4 (3rd Cir. 2008), cert. denied Hoffecker v. United States, 129 S.
Ct. 652, 172 L. Ed. 2d 615 (2008). Cases holding that the application must be filed before the
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The tolling period is from the date of the request until the foreign government takes
final action on the request.1133
There is conflict among the circuits as to whether the application to the district court
must be filed before the foreign authoritys final action on the request.1134
The tolling period cannot exceed the lesser of (i) three years or (ii) if the final action
from the foreign authority is during the otherwise applicable statute of limitations,
for more than six months.1135
I mentioned above that there are two conflicts as to when the application to the district court
must be made. The Government has a solution to avoid prejudice to the Government as to these
conflicts in interpretation. The Government can simply make the application to the district
contemporaneously or soon after the request is made within the otherwise applicable statute of
limitations. Why wait?1136
normal statute of limitation has expired. United States v. Kozeny, 541 F.3d 166, 174 (2nd Cir.
2008); and United States v. Csolkovits, 2012 U.S. Dist. LEXIS 14313 (E.D. MI 2012) (following
Kozeny).
1133
3292(b).
1134
Case holding that the application must be filed before the foreign authority has finally
acted in producing the documents: United States v. Atiyeh, 402 F.3d 354, 362-367 (3d Cir. 2005)
(holding also that foreign authorities provision of copies, leaving the originals or other copies in the
foreign country can be the final action). Cases holding that the Government may have some
additional time after final production to sift through the documents: United States v. Miller, 830
F.2d 1073, 1076 (9th Cir. 1987); and United States v. DeGeorge, 380 F.3d 1203, 1213 (9th Cir.
2004). Final action is final action to each category of requests. United States v. Torres, 318 F.3d
1058 (11th Cir. 2003). There is also some controversy over whether the final action is when the
foreign authority provides the action or when the prosecutor determines that the final action has
occurred. Compare United States v. Torres, 318 F.3d 1058, 1061-1065 (11th Cir. 2003) and United
States v. Meador, 138 F.3d 986 (5th Cir. 1998) .
1135
3292(b) & (c)(1).
1136
In United States v. Torres, 318 F.3d 1058, 1064-1065 (11th Cir. 2003), the Court in
addressing another related issue as to when the foreign authority response is final said:
Yet, the better practice by the government is to request an extension of the
suspension period when it believes that the official request for information from the
foreign government has been nonresponsive or incomplete. The district court could
then consider whether a new or supplemental request to the foreign government for
additional information is appropriate or whether the original response is truly
complete. When in doubt, it is the preferable practice that the government ask the
district court for an extension rather than make its own subjective decision on
finality. Such a practice avoids unnecessary delay and placing the defendant at the
whim of the prosecutor. It also avoids placing the prosecutor at the whim of the
foreign government.
This better practice would not solve the problem of whether the application must be filed within
the otherwise applicable statute of limitations and the foreign authoritys action is delayed beyond
that otherwise applicable statute of limitations. The solution noted in the text to file the application
- 465 -
The application to toll the statute of limitations under 3292 is filed ex parte, and the
consideration of the application and order granting the application are filed under seal.1137 So the
target of the investigation has no notice that Government is seeking to unilaterally extend the statute
of limitations or, if the Government is successful, that the statute has been extended. In the
proceeding on the application, the Government must prove by a preponderance of the evidence that
an official request has been made for such evidence and that it reasonably appears, or reasonably
appeared at the time the request was made, that such evidence is, or was, in such foreign
country.1138 What does preponderance of the evidence mean in this context? Do the Federal Rules
of Evidence (FRE) apply in the proceeding, so that the Government must introduce admissible
evidence? Since the request is inextricably tied to the grand jury which may consider hearsay
testimony which would likely not be admissible under FRE, may hearsay evidence be used to meet
the Governments burden in the ex parte proceeding? One court addressed related issues in holding
that (1) the Governments application must contain affirmative evidence other than bare allegations
in the application and (2) the Government cannot later after an indictment in the extended limitations
period correct deficient evidence in the original application.1139 The Court declined to address the
issue of whether FRE applied in the application proceedings (which would have resolved the issue
of the types of uses to which hearsay testimony can be put).1140
Because, as noted, no one outside the grand jury team may know that the statute has been
extended, you as a practitioner will be a considerable disadvantage in advising the client as to the
criminal statute of limitations for misconduct. Perhaps, the better part of wisdom is to caveat the
advice with a statement that the advice may be subject to any action, known or unknown, that would
cause the statute of limitations to be extended. Thus, the client may be lulled into a false sense of
security.
If indicted, the defendant will have the opportunity to test the validity of any 3292 order
extending the statute of limitations. Recent cases indicate that the courts will be attentive to proper
objections.1141
immediately upon request fixes that issue. Perhaps the Government could thereafter, in a
supplemental hearing, obtain the district courts guidance as to when the foreign authority action is
final.
1137
See United States v. Trainor, 376 F.3d 1325 (11th Cir. 2004).
1138
3292(a)(1).
1139
United States v. Trainor, 376 F.3d 1325 (11th Cir. 2004).
1140
Id. fn. 3. The court did suggest elsewhere in the opinion that the application could
include hearsay allegations if there is assurance of reliability, but did not state that the standards for
reliability were the same as under FRE. Basically, I think, the court punted on the issue because it
did not have to resolve it in that case. See also Judge Barketts concurrence.
1141
United States v. Trainor, cited above, is a good recent example; see also United States
v. Wilson, 249 F.3d 366 (5th Cir. 2001) (although holding that it is a fact issue as to whether the
procedures for extension of the statute have been properly invoked by the Government) and United
States v. Wilson, 322 F.3d 353 (5th Cir. 2003) (holding that the Government did not prove by a
preponderance of the evidence that the request had been properly made to the foreign government).
- 466 -
3.
Superseding Indictments.
The Government often files an indictment and thereafter files a superseding indictment.1142
The superseding indictment will have factual allegations, even additional counts or additional
defendants not previously contained in the original indictment. Statute of limitations issues may be
presented in such superseding indictments. A succinct statement of the law in the context of an
offense conspiracy is:
It is black letter law that once an indictment is brought, the statute of
limitations is tolled as to the charges contained in that indictment. Further, a
superseding indictment that supplants a pending timely indictment relates back to the
original pleading and inherits its timeliness as long as the later indictment does not
materially broaden or substantially amend the original charges. In determining
whether a superseding indictment materially broadens or amends the original
charges, we will consider whether the additional pleadings allege violations of a
different statute, contain different elements, rely on different evidence, or expose the
defendant to a potentially greater sentence. No single factor is determinative; rather,
the touchstone of our analysis is notice, i.e, whether the original indictment fairly
alerted the defendant to the subsequent charges against him and the time period at
issue.
To the extent Indictment S5 alleges a different time frame for the conspiracy
(October 1995 through June 1996) than Indictment S2 (October 1995 through August
1996), the law is clear that there is no obstacle to relation back when a superseding
pleading narrows, rather than broadens, the original charges. Accordingly, we reject
this part of Benussi's challenge without further discussion.
This court has not yet ruled on whether the addition of new overt acts to a
superseding indictment constitutes a substantial alteration in the original charge so
as to preclude relation back. A number of our sister circuits have upheld relation
back where additional overt acts simply flesh out or provide more detail about the
originally charged crime without materially broadening or amending it. We adopt
this approach and hold that the same standard of review applies to overt acts as to
any other aspect of a superseding pleading, i.e., whether the new acts materially
broaden or substantially amend the original pleading. 1143
1142
United States v. Millet, 559 F.2d 253, 257-58 (5th Cir. 1977) (This Court has held
that a super[s]eding indictment may be returned at any time before a trial on the merits.).
1143
United States v. Salmonese, 352 F.3d 608, 622-3 (2d Cir. 2003) (securities case; case
citations and quotations omitted),; see also United States v. Daniels, 387 F.3d 636, 642-643 (7th Cir.
2004)cert. denied, 544 U.S. 911 (2005); and United States v. McMillan, 600 F.3d 434 (5th Cir. 2010)
(A superseding indictment that is filed while the original indictment is pending will relate back to
the original indictment, and therefore also be timely, unless it broadens or substantially amends the
charges. (Citing Salmonese). In United States v. Hickey, 580 F.3d 922, 929 (9th Cir. 2009), the
Court said that the central question is whether the defendant was fairly on notice of the charges
- 467 -
Thus, if the superseding indictment merely adds more particularity to counts already charged, the
superseding indictment will not fail unless the original indictment was so deficient that it did not
fairly inform the defendant of the charge.1144
III.
Chart of Statutes of Limitations.
The following chart of statutes of limitations for the most frequently encountered tax and
related crimes is derived from CTM 7.01[2] (2008 ed.).
Description of the Offense
Code
Section
Statute of
Limitations
Code Section
Tax Evasion
7201
6 years
6531(2)
Failure to Collect, Account For and Pay

Over
7202
6 years
6531(4)
Failure to Pay Tax
7203
6 years
6531(4)
Failure to File a Return
7203
6 years1145
6531(4)
Failure to Keep Records
7302
3 years
6531
Failure to Supply Information
7203
3 years
6531
Supplying False Withholding Certificate
7205
3 years
6531
that are added by the superseding indictment.

The Hickey court also addressed a potential trap for the unwary with respect to superseding
indictments. Any charge in the prior indictment that the superseding indictment supposedly
supersedes remains live and capable of prosecution even if not contained in the superseding
indictment, or, alternatively, the Government can then choose which of the two indictments to
pursue. At least to me, this seems counterintuitive (as the dissenting judge in Hickey notes
powerfully), but it seems to the mainstream holding. In the only case that I recall handling involving
a superseding indictment, the only key difference was to add defendants and related counts so the
issue of which indictment would be the operative one was never in issue.
1144
See, for an application of this rule, United States v. Laspina, 299 F.3d 165, 178-180
(2d Cir. 2002).
1145
As provided by Section 6531(4), the six-year rule for failure to file a return does not
apply to returns that are required to be filed under part III of subchapter A of chapter 61. Part III
covers information returns required to be filed under 26 U.S.C. 6031-6060, and includes, for
example, partnership returns, returns of exempt organizations, subchapter S returns, and returns
relating to cash received in a trade or business (Form 8300). The rules in this area are rather
complicated, as there is a further exception that makes the applicable limitations period for failure
to file a subchapter S return six years, rather than the three-year period generally applicable for
failures to file information returns. See 26 U.S.C. 6037(a). Reference should be made to these
specific Code provisions for a more detailed discussion of applicable limitations periods.
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Filing a False Tax Return
7206(1)
6 years
6531(5)
Aid or Assist in Preparation of False Tax

Return
7206(2)
6 years
6531(3)
Deliver or Disclose False Document
7307
6 years
6531(5)
Attempt to Interfere with Administration of

Internal Revenue Laws
7212(a)
6 years1146
6531(6)
Conspiracy to Commit Tax Evasion
18 U.S.C.
371
6 years
6531(8)
Conspiracy to Defraud IRS (Klein)
18 U.S.C.
371
6 years
6531(1)
False Claim for Refund
18 U.S.C.
286/287
5 years
18 U.S.C.
3282
False Statement
18 U.S.C.
1001
5 years
18 U.S.C.
3282
1146
Section 7212(a) refers to two types of offenses: (1) impeding employees of the United
States acting in an official capacity; and (2) impeding the administration of the Internal Revenue
laws. The Tax Division takes the position that a six-year limitations period applies to offenses under
both prongs of Section 7212(a), pursuant to 26 U.S.C. 6531(6). Reference should be made to the
discussion of this issue in the chapter dealing with Section 7212(a). See Chapter 17.00, infra.
- 469 -
CH. 6 - VENUE
I.
General Venue Concepts.

A.
General Rule - Where Crime Committed.
The Constitution requires that trials be held in the State and district wherein the crime shall
have been committed. U.S. Constitution, Sixth Amendment; see also U.S. Constitution Art. III,
2, cl. 3 (The trial of all Crimes . . . shall be held in the State where the said Crimes shall have been
committed.);1147 and FRCrP 18 (Unless a statute or these rules permit otherwise, the government
must prosecute an offense in a district where the offense was committed.). The focus in each
instance is where the crime was committed.
Where the crime was committed will be apparent in most cases, but in some cases it might
not be apparent. The following is a summary of the analysis a court will undertake:
If the federal statute defining an offense does not indicate explicitly where
Congress believes the criminal act is committed, the locus delecti must be
determined from the nature of the crime alleged and the location of the act or acts
constituting it. The test for venue is best described as a substantial contacts rule that
takes into account a number of factors -- the site of the defendant's acts, the elements
and nature of the crime, the locus of the effect of the criminal conduct, and the
suitability of each district for accurate fact-finding. 1148
B.
Proper Venue is an Element that the Government Must Prove at Trial.
Proper venue, being constitutional, is an essential element of the Governments proof and
is not to be taken lightly as a mere technicality.1149 And, proper venue, where contested is an issue
for the jury to determine.1150
1147
Technically, Article III specifies 'venue' and the Sixth Amendment specifies
'vicinage,' but that refined distinction is no longer of practical importance. United States v. Royer,
549 F.3d 886, 893 n.8 (2d Cir. 2008), quoted in United States v. Coplan, ___ F.3d ___, ___ n. 31,
2012 U.S. App. LEXIS 24613 (2d Cir. 2012).
1148
United States v. Strawberry, 892 F.Supp. 519, 521 (S.D. N.Y. 1995) (quotations and
case citations omitted).
1149
Green v. United States, 309 F.2d 852, 857 (5th Cir. 1962); United States v. Stickle,
454 F.3d 1265, 1273 (11th Cir. 2006); United States v. Muhammad, 502 F.3d 646, 656 (7th Cir.
2007).
1150
See United States v. Snipes, 611 F.3d 855, 865-868 (11th Cir. 2010) (rejecting also
the argument that Snipes was entitled to a pretrial hearing on this issue so that he could testify as to
venue without waiving his Fifth Amendment right if he were to testify on the issue at trial).
- 470 -
C.
Continuing Offenses - Acts in Multiple Districts.
Offenses begun in one district and completed in another, or committed in more than one
district may be tried in any district in which the offense was begun, continued, or completed. 18
U.S.C. 3237(a).1151 The prosecution must show, by a preponderance of the evidence, that some
part of the crime was committed within the district of prosecution.1152 This phenomenon of
venue-creating material acts in multiple districts is often referred to as continuing offenses.
To illustrate the continuing offense concept, consider a false statement to an IRS agent in a
face-to-face interview. False statement is a crime under 18 U.S.C. 1001. The false statement is
committed most obviously at the location of the false statement. If, however, that false statement
is given in a context where it will be passed to and used by Government investigators in another
district, then venue can lie in that district as well.1153
In the case of conspiracies, all conspirators may be tried in any district in which the
conspiracy was formed or an overt act in furtherance of the conspiracy occurs.1154 An overt act
otherwise outside the criminal statute of limitations is sufficient to confer venue.1155
D.
Transfer for Convenience of Parties and Interests of Justice.
Rule 21(b), FRCrP provides that a court may move venue to another district for the
convenience of the parties and witnesses, if justice so requires.
II.
Venue in Tax Cases.

A.
Tax Crimes.
Most of the tax crimes and related crimes that we have studied are continuing offenses
allowing venue in each district in which a material act occurs. For example, in the case of tax
evasion by the filing of a return or tax perjury with respect to a filed return, venue may be where the
return was prepared, signed, mailed or filed.1156 A fraudulent return prepared, mailed and signed in
Houston and sent to the Austin Service Center for filing creates venue in the Southern District of
Texas (the district for Houston) and in the Western Distict of Texas (the district for Austin).
1151
United States v. Magassouba, 619 F.3d 202, 205 (2d Cir. 2010) (Constitution does
not command a single exclusive venue where more than one location is implicated).
1152
United States v. Maldonado-Rivera, 922 F.2d 934, 968 (2d Cir. 1990), cert. denied,
501 U.S. 1211 (1991).
1153
United States v. Coplan, ___ F.3d ___, ___ - ___, 2012 U.S. App. LEXIS 24613 (2d
Cir. 20112).
1154
Downing v. United States, 348 F.2d 694 (5th Cir. 1965), cert. den. 382 U.S. 901
(1965).
1155
United States v Tannenbaum, 934 F.2d 8 ((2nd Cir. 1991).
1156
E.g., United States v. Slutsky, 487 F.2d 832, 839 (2d Cir. 1973), cert. denied, 416
U.S. 937 (1974).
- 471 -
However, if a taxpayer is charged outside his or her district of residence, the taxpayer may elect to
be tried in his or her district of residence if the charge is (a) failure to file under 7203 or (b)
evasion ( 7201), tax perjury ( 7206(1)) or aiding and assisting ( 7206(2)) and venue elsewhere
is based solely on a mailing to the IRS.1157
The foregoing assumes perhaps the simplest fact pattern. However, consider that tax evasion
requires attempts to evade that may occur in more than one district. Venue would be appropriate
in any of those districts. Consider the following from a case in which a noted sports figure had no
material contact with the district of indictment other than the fact that he received cash in that
district and the Government alleged that he received the cash with an intent then to evade tax by not
reporting the cash on his return.
Because an attempt to evade tax can occur over time and in more than one
judicial district, a violation of 7201 is a continuing offense within the meaning
of 18 U.S.C. 3237(a). Courts have found venue for 7201 offenses to be proper
in any district where an affirmative act constituting an attempt to evade was begun,
continued or completed. To establish an attempt to evade, the Government must
show that the defendant engaged in some affirmative act with a tax evasion motive.
In cases where venue was premised on acts other than those connected to the
preparation, signing, mailing or filing of the tax return at issue, courts have turned
for guidance to the Supreme Court's analysis in Spies v. United States, 317 U.S. 492
(1943) to determine whether the defendant engaged in an affirmative act constituting
an attempt to evade. In Spies, the Supreme Court stated that the affirmative act
requirement should be read broadly: Congress did not define or limit the methods
by which a willful attempt to defeat or evade might be accomplished and perhaps did
not define lest its efforts to do so result in some unexpected limitation. Spies, 317
U.S. at 499. The Court provided examples of conduct from which an attempt to
evade could be inferred:
By way of illustration, and not by way of limitation, we would think
affirmative willful attempt may be inferred from conduct such as keeping a
double set of books, making false entries or alterations, or false invoices or
documents, destruction of books or records, concealment of assets or
covering up sources of income, handling of one's affairs to avoid making the
records usual in transactions of the kind, and any conduct, the likely effect
of which would be to mislead or to conceal. If the tax-evasion motive plays
any part in such conduct the offense may be made out even though the
conduct may also serve other purposes such as concealment of other crime.
Spies, 317 U.S. at 499.1158
1157
18 U.S.C. 3237(b).
United States v. Strawberry, 892 F.Supp. 519, 521-522 (S.D. N.Y. 1995) (footnotes
omitted; all case citations except Spies omitted; parallel citations omitted).
1158
- 472 -
Applying Spies, the District Court found venue, reasoning:

When the receipt of cash is coupled with the intent to evade tax,
Goldschmidt's distinction between inherently deceptive, Spies-qualifying conduct
and Strawberry's allegedly benign conduct [just receiving cash] has considerably less
force. In fact, courts have recognized that otherwise legal activities can constitute
an attempt to evade, if they are performed with the intent to evade tax. See United
States v. Jungles, 903 F.2d 468, 474 (7th Cir. 1990) (act of entering into . . .
'independent contractor agreement,' even though a lawful activity in-and-of-itself,
can serve as an 'affirmative act' supporting a conviction under 7201 if it is done
with the intent to evade income tax.); United States v. Beall, 970 F.2d 343, 346-47
(7th Cir. 1992) (although there was no direct evidence that [defendant] used [the
Mid-America Commodity and Barter Association (MACBA)] to conceal his
income from the IRS, . . . it was reasonable for the jury to infer that one purpose of
[defendant's] assignment of wages to MACBA was to evade paying income taxes.),
cert. denied, 113 S. Ct. 1291, 122 L. Ed. 2d 683 (1993).
This Court finds no reason to distinguish the receipt of cash with the intent
to evade tax from what these other courts have found to be Spies-qualifying conduct.
Accordingly, this Court finds that the Government's allegations that Strawberry's
attempt to evade tax by means including the receipt of cash in the Southern District
sufficiently allege an affirmative act of attempted evasion within the meaning of
Spies, and thus, venue.1159
Venue in the case of failure to file a return is the judicial district where the omission
occurred. Although the failure to file may be technically viewed as occurring at the place of filing
(e.g., the Service Center in the case of a tax return), venue is proper in the district of the defendants
residence.1160 Indeed, if the IRS were to attempt any venue other than the district of the defendants
residence at the time of the offense, the defendant has an absolute right to transfer venue to his
district of residence at the time of the offense.1161
Venue in related crimes (such as false statements under 18 U.S.C. 1001) can be had in any
district where a material component of the false statement was made.
In addition, FRCrP Rule 21(b) provides the court the authority, upon the defendants motion,
to transfer to another district [f]or the convenience of parties and witnesses, and in the interests of
justice. Factors relevant to this decision include usual equitable factors: defendants location,
witnesses location, location of documents and records, and docket considerations in the respective
districts.1162
1159
1160
1161
1162
United States v. Strawberry, 892 F.Supp. 519, 523-524 (S.D. N.Y. 1995).
United States v. Quimby, 636 F.2d 86, 90 (5th Cir. 1981).
18 U.S.C. 3732(b).
Platt v. Minnesota Mining & Mfg. Co., 376 U.S. 240, 243-4 (1964).
- 473 -
Where venue is solely based on where the return or other document was filed, a defendant
may move the case for trial to the district where he or she resided at the time of the offense.1163
For further materials on venue, I refer you to the CTM which discusses the major tax crimes
and, for most of them, has a discussion as a subheading of the proper venue for those tax crimes.
B.
Government Burden to Establish Venue.
The Government must establish proper venue, but since venue is not an element of the crime,
it must establish venue only by a preponderance of the evidence.1164
C.
Waiver of Venue.
Improper venue may be waived by the defendant. The usual context in which waiver appears
in the decided cases is where the defendant fails to timely raise the objection as to venue.1165
D.
Motion to Transfer Venue.
Rule 18 FRCrP permits motions to transfer venue also can be based on the convenience of
the defendant, the witnesses, or the interests of justice. The showing of inconvenience of the
Governments choice of venue must be strong, particularly if there are other efficiencies to be gained
by the Governments choice; still, in appropriate cases courts grant the transfer.1166
E.
DOJ Tax Policies.
DOJ Tax policy is to indict in the district of the taxpayers residence or, if a juridical entity,
in the district of the taxpayers principal place of business.1167
1163
18 U.S.C. 3237(b).
E.g., United States v. Maldonado-Rivera, 922 F.2d 934, 968 (2d Cir. 1990), cert.
denied, 111 S. Ct. 2811 (1991). Venue, however, is not an essential element of the government's
case because failure to establish this element does not impact on the guilt or innocence of the
defendant. United States v. Griley, 814 F.2d 967, 973 (4th Cir. 1987).
1165
E.g, United States v. Netz, 758 F.2d 1308, 1311 (8th Cir. 1985); and United States
v. Black Cloud, 590 F.2d 270, 272 (8th Cir. 1979)
1166
Compare United States v. Stein, 429 F.Supp. 2d 633, 643-646 (S.D.N.Y. 2006)
(denying venue when the Governments choice of venue in the Southern District of New York for
the multiple defendant large criminal case was as good as available venue for the defendants
requesting transfer) with United States v. Auffenberg, 07-30042-MJR (S.D. Ill. Mar. 26, 2007)
(transferring the case to the U.S. Virgin Islands which was the center of gravity for the case, in terms
of topic and the large number of witnesses).
1167
CTM par. 6.01[2] (2008 ed.).
1164
- 474 -
III.
Starting Point for Further Research.
A good starting point for further research on venue issues is the CTM, Section 6 which is
devoted to venue. You should also look at the discussions in later Sections discussing specific tax
crimes (e.g., Section 8.00 discusses the crime of tax evasion in detail and includes in Section 8.07
a discussion of venue).
- 475 -
CH. 7 - ENFORCEMENT STRATEGIES, POLICIES AND PRACTICES

I.
Introduction.
Whether to indict is a prosecutorial judgment call. The Government is not required to indict
and try a person whom it knows to have committed a crime. Further, as we have seen, as to
particular conduct, the Government may charge a defendant cumulatively for separate crimes all
arising from the same pattern of conduct. Or the Government may indict a defendant for some of
the crimes which the Government the defendant committed but not for others.
Even more basic Government discretion is whether to even investigate the taxpayer or any
other person putatively committing a crime. Tax crimes and other crimes that are not
investigated are not prosecuted. The Government does not investigate all persons it knows or
believes to have committed tax or other crimes. I deal in this chapter with the Governments
priorities that go into the mix in making decisions of when and how to prosecute.
II.
Getting in the Governments Cross-Hairs.
Most taxpayers who commit tax crimes are never caught. They win the audit lottery and
their tax misconduct never otherwise comes to the attention of the Government.
But, the Government manages to discover enough taxpayers, so that given its enforcement
priorities, it can cherry pick the most egregious i.e., winnable -- cases for criminal investigation
and prosecution. How do tax criminals come to the Governments attention?
Other IRS enforcement activities principally audits and collection activity produce many
candidates for criminal investigation and prosecution. According to recent statistics about 32% of
IRS CI subject investigations are generated from such internal IRS activities.1168 A much larger
source for subject investigations is United States Attorneys offices and other governmental agencies
principally involved nontax law enforcement, which account for well over 50% of IRS CI subject
investigations.1169 These would be principally illegal source investigations. Other less significant
sources include: (i) informants often former spouses, lovers, employees, partners, what have you
also offer the Government many candidates for criminal investigation and prosecution; and (ii)
newspapers and publicity of conduct that might carry with it tax cheating.
At this point it is helpful to go back to the key distinction between legal source and illegal
source investigations. The Webster Report had concluded that CI was too fixated on the latter and
that more legal source cases could better serve CIs mission of undergirding the tax system. So,
some alternative statistics are in order. About 40% of all IRS investigations are legal source
investigations.1170 Within the legal investigation category, almost 60% of the subject investigations
came from internal IRS referrals to CI. Thus, for those of you like me who handle or will principally
1168
1169
1170
TIGTA July 2008 CI Report, Appendix V, Figure 8.

Id.
TIGTA July 2008 CI Report, Appendix V, Figure 6.
- 476 -
handle legal source cases, most of the cases will have been generated internally by the IRSs other
enforcement activity. And there is still another statistic, in the last fiscal years (2007), the number
of referrals within the IRS was 612 and CI has accepted only about 68% of those referrals.1171
The IRS is also moving slowly but inexorably into the modern world by developing
computer techniques designed to pick up tax cheats. The Government has computer scoring
methods for determining which returns should be audited, at least at some level, and these may flush
out candidates for criminal investigation and prosecution. For example, in a recent criminal
appeal,1172 the hapless tax return preparer was put in the IRSs cross-hairs by a computer program
that correlated tax return preparers to returns in which an unusually high number of deductions
relative to adjusted gross income were claimed. A pattern of potential misconduct that might not
have been spotted without the computer program thus emerged and prompted a criminal
investigation of the hapless preparer.
III.
CI Compliance Strategies.
A.
The Mission Statement.
I quoted CIs mission statement in the introductory materials, but repeat it now:
Criminal Investigation serves the American public by investigating potential criminal
violations of the Internal Revenue Code and related financial crimes in a manner that
fosters confidence in the tax system and compliance with the law.1173
As noted elsewhere, by publicizing its efforts, the IRS gets the maximum ripple effect of its
limited enforcement activity. CI thus states the following Law Enforcement Criteria:1174
Investigations will be identified, initiated, and conducted in a manner that fosters
confidence in the tax system and compliance with the law. The investigations must
identify individuals and organizations that meet the compliance strategy as detailed
in the ABP [Annual Business Plan]. In determining if an investigation meets the
definition of CI's mission, the following should be considered:
(a) high profile
(b) egregious allegations
(c) deterrent effect
(d) conformity with ABP
1171
Id. Appendix V, Figure 9.

United States v. Jennings (4th Cir. 2002), affirmed by unpublished per curiam opinion
which is unofficially reported at 2002 TNT 222-57 (11/18/02).
1173
IRM 9.1.1.2 Criminal Investigation's Mission (11-04-2004).
1174
IRM 9.1.1.4 Law Enforcement Criteria (05-30-2008).
1172
- 477 -
In support of this mission, CI has publicly announced compliance strategies to assist in

identifying, developing, and investigating cases that foster confidence in the tax system and
compliance with the tax law.1175 Lets first look at some statistics.
B.
Statistics.
Benjamin Disreali once mused that there are lies, damned lies, and statistics.1176 Here are
some statistics as presented on the IRS web page:1177
InvestigationsInitiated
TaxInvestigations
OtherFinancialCrimes
Total
ProsecutionRecommendations
TaxInvestigations
Total
Indictments/Informations
TaxInvestigations
Total
Sentenced
TaxInvestigations
Total
2008
2009
2010
2283
1466
3749
2612
1509
4121
2889
1817
4706
1297
1488
2785
1278
1292
2570
1507
1527
3034
1171
1376
2547
1141
1194
2335
1250
1395
2645
1016
941
1957
1113
1116
2229
1054
1118
2172
2011 Average
2682
2617
2038
1708
4720
4324
1610
1423
1800
1527
3410
2950
1325
1222
1673
1410
2998
2631
1162
1086
1044
1055
2206
2141
The conviction rate is quite high. The data is not presented for convictions, but it is for
sentencing. Since convictions result in sentencing, I derive over this 4 year period a conviction rate
on Tax Investigations (not including Other Financial Crimes) of 89%. However, DOJ Tax
prosecutes more tax and tax related crimes than those referred by the IRS, and as recently as 2007,
1175
CIs website sets forth some of its priorities and initiatives. For a general discussion
of how enforcement activities support overall compliance , see Leandra Lederman, The Interplay
Between Norms and Enforcement in Tax Compliance, 64 Ohio St. L. J. 1453, 1484-1499 (2003)
1176
This quote is sometimes attributed to Mark Twain.
1177
The IRS web sited titled Enforcement Statistics - Criminal Investigation (CI)
Enforcement Strategy (as of 9/18/12). Similar and more detailed statistics are contained in the
TIGTA Report 2011-30-068 (7/12/11), titled Trends in Criminal Investigations Enforcement
Activities Showed Improvements for Fiscal Year 2010, With Gains in Most Performance Indicators.
- 478 -
DOJ Tax claimed a conviction rate on the whole subset at 97%. I am skeptical as to that percentage,
but the conviction rate (whatever it is precisely) is high.1178
Assuming arguendo a conviction rate of 97% and the year for that statistic is representative,
that appears to be and certainly is a whopping conviction rate. But, we might extend those
statistics working from the known to the unknown and make some interesting speculations. Lets
say that tax crimes fit the general federal crimes pattern where 95% of the cases plead. This means
that only 5% of the tax indictments are tried. Then, assuming a 97% conviction rate, it would appear
the only 2 of 5 that go to trial end in conviction. In other words, for those cases going to trial the
defendant has an implied success rate of 60%. And what that might further imply is that for at least
some of the 95% pleading (say the 10% portion that are the weakest cases), the defendants might
have been better off had they gone to trial. But this is just speculation from a statistical data set that,
I think, overstates the conviction rate. With a lesser conviction rate, the implied success rate might
increase marginally (my speculation).
Better statistics (clearly apples to apples) from the above table (covering the years 20082011) would be derived percentages as follows: (i) IRS criminal Tax Investigations that lead to
recommendations to DOJ Tax CES compared to criminal Tax Investigations Initiated - 54%
(meaning, on average, 46% of criminal investigations are not referred); and (ii) IRS CI Tax
Investigations charged (Indictments / Informations) compared to those recommended - 86%
(meaning, on average, 14% not guilty or dismissals).
For further context, consider the number of returns filed with the IRS each year. I repeat
here some of the statistics I discussed earlier in the book in discussing the audit lottery concept. The
following is from the IRS 2009 Data Book.1179
The IRS processed over 167 million income, estate and gift tax and
nontaxable (e.g., partnership) returns.1180
Returns from the foregoing amount that were examined in f/y/e 2009 - just
over 1,496,495, with an indicated percentage coverage of less than 1%.1181
1178
DOJ Taxs statistics were presented in a report titled: Eileen J. OConnor, Assistant
Attorney General, Statement to the Senate Finance Committee, titled Filing Your Taxes: an Ounce
of Prevention Is Worth a Pound of Cure (4/12/07). The statement is here:
http://finance.senate.gov/imo/media/doc/041207testeo1.pdf
I could not reconcile them with the IRS statistics, however. I asked DOJ Tax to provide an
explanation and the request was declined (from my perspective, because they were not reconcilable).
Nevertheless, for present purposes, the specific claim by DOJ Tax was that [O]ur conviction rate
is high on the order of 97 percent for the 2006 fiscal year. (See p. 3.).
1179
See 2009 Data Book.
1180
Table 9.
1181
Table 9.
- 479 -
From this universe, there is even a smaller subset criminal investigations (although a
significant portion of criminal investigations relate to returns that are not filed and thus not within
the filed return statistics above). So, focus back on the criminal table just above, and look at the
rows for criminal investigations, indictments and convictions a pittance of the total taxpayers.
The statistical analyses permit some fair conclusions for present purposes. First, relative to
the number of taxpayers and tax returns filed or required to be filed, the prosecution rate is low
very low. Second, relative to the number of indictments, the conviction rate is very high. Third,
relative to the number of convictions, the incarceration rate is very high, although as I note later, due
to developments in the sentencing regime, the incarceration rate for pure tax crimes is likely
declining..
Policy questions that come easily to mind are: What is the incentive for taxpayers to comply
voluntarily with such a low rate of criminal prosecutions and convictions relative to the number
of taxpayers overall? How can the Government maximize the incentive value of such low rates?
Can taxpayers assume that, since the Government pursues so few tax evaders, the Government will
focus on the really, really bad guys and will leave marginal tax cheats (our clients) alone? Is gaming
the tax system simply a variation of the old Wall Street theme that you can make money being a
bear, and you can make money being a bull, but you cant make money being a pig? Is this pig
theory at work in the criminal tax area? The answers are yes and no.
C.
Legal Source Cases.

1.
Renewed Focus on Legal Source Cases.
For data keeping purposes, CI generally categorizes its compliance activities and strategies
in three components:1182
Legal source investigations. These investigations involve legal occupations or

industries and legally earned income in which the primary motive is the violation of
tax statutes. The tax statutes involved are: the crimes in the Code and the following
Title 18 U.S.C. sections: 286 and 287 (2004), 371 (k) (2004) relating to a Title
26 violation, and 371 (b) (2004) relating to a Title 26 and a Title 31 violation.
Essentially, these include crimes that only the IRS has the authority to investigate.
Illegal source investigations. These investigations involve illegally earned income

and include money laundering and currency reporting crimes. These crimes may or
may not include tax or tax related violations. For data keeping purposes, these
investigations are categorized as illegal source investigations once another agency
becomes involved.
Narcotics Related. This strategy involves the investigation of leaders and other top
echelon members of high-level drug trafficking organizations and their orchestration
1182
The source for this is TIGTA March 2008 CI Report.
- 480 -
of financial activities directing the transportation, distribution, and laundering of

illegal drug proceeds.1183
Consistent with the Webster Report, the IRS has re-focused its effort on legal source cases.
I noted in discussing the Webster Report that the CI had mission drift as a result of its increasing
deployment of resources toward nontax crimes. The Webster Report recommended that CI re-focus
its efforts on the types of crimes that support the tax system, particularly on legal source income.
As noted, legal source cases means that the principal focus of the investigation are traditional tax
crimes and not other types of crimes. Basically, this means a focus on people with legal income
sources who are not paying their taxes. The tax gap, of course, includes taxes on income both from
legal and illegal sources, but the legal source component of the tax gap is probably the largest and
the most susceptible to influence by well-publicized criminal tax enforcement initiatives. Hence,
shifting more resources to legal source compliance seems more consistent with the mission of CI
to support overall tax compliance.
The TIGTA March 2005 CI Report states that CI confirms that CI has changed its audit
priorities, although TIGTA was unable to determine if the IRS has achieved the best mix to
undergird the critical IRS compliance function.1184 The TIGTA July 2008 CI Report offers among
its statistics that CIs legal source subject investigations compared to all of its subject investigation
was about 50% during the 2007 fiscal year.1185 At the May 2008 ABA Tax Section meeting, the
Assistant Attorney General for the Tax Division stated that, currently, 2/3's of the cases are legal
income cases.1186 Even as increased, one has to wonder whether such a relatively low percentage
of legal source investigations meets the Webster Commissions identified goals.1187 But the trend
is in the right direction.
How does CI spend the balance of its time currently? The chief of CI, Nancy Jardini,
recently said:
About 40 percent of CI's work involves illegal income cases, including
corporate fraud, public corruption, and counter terrorism, said Jardini. Counter
terrorism efforts take up about 3 percent of CI's resources, she said. CI has a
1183
IRM 9.1.1.3.1.1 Program Direction (11-04-2004).

TIGTA 2005 CI Report.
1185
TIGTA 2008 Report, Appendix V, Figure 13.
1186
Comments of Nathan Hochman, AAG Tax, to the Civil and Criminal Penalties
Section, ABA Tax Section May Meeting (5/10/08).
1187
CI obviously feels that it does and, in any event, touts a study performed at the IRSs
request as concluding the mix of investigations (tax versus money laundering) does not have a
significant impact on voluntary compliance. TIGTA May 2005 CI Report, Appendix VI,
Managements Response. I think this roughly equates with legal source and illegal source, but
cannot state that for sure.
1184
- 481 -
presence in Baghdad in the embassy and agents embedded with the military to assist
in training Iraqis on how to follow the money, she said. 1188
2.
Specific Legal Source Initiatives.

a.
Nonfiler Enforcement Program.
There are a large number of nonfilers who operate outside the tax system. The Nonfiler
Enforcement Strategy, an IRS wide-strategy, is designed to bring them back into the system. CIs
role in this strategy is to identify persons who have not responded to the IRSs efforts to bring them
back into the system and to criminally prosecute those persons in order to encourage others to
comply.
b.
Employment Tax Enforcement Program.
The IRS has identified significant noncompliance with respect to employment taxes. Even
before the recent wave of protestor cases whereby small business owners simply refused to comply
based on a host of frivolous arguments, the IRS had identified significant schemes in various
iterations where taxes were withheld but not turned over to the IRS. And, there is the willfully
deliberate noncompliance area exemplified in cases such as Evangelista involving a Section 7202
prosecution.
c.
Abusive Trust Schemes.
The IRS has identified a number of abusive trust schemes. Although there are various
iterations, one such scheme might involve the use of several trusts that at some point move income
offshore without paying tax on it. The use of the trusts essentially are efforts to hide the ball. There
are both domestic trust schemes and foreign trust schemes, all of which are designed to hide
otherwise taxable income and create deductions for personal living expenses.
D.
Illegal Source Cases.
The IRS also has an initiative to pursue illegal source financial crimes. This is everything
from embezzling to health care provider fraud. Persons involved in these types of crimes often do
not report the income illegally derived. Hence, the IRS has to keep and renew enforcement exposure
in this area.
E.
Narcotics Cases.
The IRS also has a narcotics related strategy. Income earned by persons involved in the trade
usually is not taxed. Consistent with the Webster Report, the IRS will deploy less of its resources
in this area, but it is by no means abandoning the area.
1188
Sheryl Stratton, Criminal Tax Enforcement of Legal Source Income Cases is Up,
Officials Say, 2006 TNT 208-1.
- 482 -
IV.
Standards for Prosecuting Tax Crimes.

A.
Introduction to the Process.
Consider the following from Judge Posner in addressing the interplay between the
requirement that, for conviction, the proof must establish guilt beyond a reasonable doubt and the
prosecutorial judgment call as to who to prosecute:
Judges, when asked to express proof beyond a reasonable doubt as a
probability of guilt, generally pick a number between .75 and .90 (depending on the
judge), and jury quantifications are similar. These may seem shockingly low figures,
implying that as many as a quarter of the people convicted of crime are innocent. Not
so. The higher the crime rate in relation to prosecutorial resources, the more
thoroughly prosecutors will screen cases for easy ones to win, and these will tend to
be drawn from the tail of the distribution of suspects that contains the suspects who
are most likely to be guilty. The heavy burden of persuasion and the other procedural
advantages of criminal defendants increase the incentive of prosecutors to go after
the most guilty by making it difficult to convict a defendant (notwithstanding the
disparity in resources between the prosecuting authorities and all but the wealthiest
defendants) unless the case is one sided against him. If because of prosecutorial
screening only one percent of the persons prosecuted are innocent, then even, if all
are convicted, only one percent of convicted defendants will be innocent. And that
is an exaggeration. Not all persons who are prosecuted are convicted, and it is
normally much easier for an innocent defendant to create enough doubt in the trier
of fact to induce an acquittal.
Tight screening implies that some, perhaps many, guilty people are not
prosecuted and that most people who are prosecuted and acquitted are actually
guilty. In the previous example, if a ten percent acquittal rate is assumed, then
ninety-nine percent of the defendants acquitted would actually have been guilty if the
probability of acquittal was random with respect to innocence and ninety percent if
all innocent defendants were acquitted. This implies that when crime rates rise faster
than prosecutorial resources, entailing an even finer mesh in the screening of cases
to pursue, the procedural advantages of defendants should be reduced by courts or
legislatures if society wants to maintain the same balance between the probabilities
of convicting the innocent and of acquitting the guilty. This point suggests a possible
nonideological basis for the Supreme Court's swing against the rights of criminal
defendants in the 1970s and 1980s. Had those rights been preserved intact, the rise
in crime rates in that era (which greatly exceeded the increase in the number of
prosecutions) would have had the paradoxical effect of making it easier for guilty
defendants to avoid punishment. That in turn would have reduced the expected cost
of punishment, and so driven crime rates even higher, unless there was an offsetting
increase in the severity of punishment for those (fewer) criminals who were caught
and convicted.
- 483 -
The assumption in the preceding paragraph of crime rates rising faster than
prosecutorial resources suggests an alternative response to rising crime rates to
curtailing defendants' procedural rights: increasing prosecutorial budgets. Courts
could exert pressure on legislatures to do this by holding the line on procedure and
invalidating (as cruel and unusual) steep legislative increases in the severity of
criminal punishments. Legislatures would be forced to choose between increasing
prosecutorial budgets and higher crime rates that would place additional pressure on
the courts to relax procedural safeguards. The courts chose not to play this game of
chicken with federal and state legislators.1189
B.
Standards for Tax Crimes.
The goal of the criminal tax enforcement system is to undergird and support the overall
revenue function of Government. The Government has made the policy choice that it will be highly
selective about the cases that it will try. The reason is that, given the rather limited resources that
it and the courts can invest in tax prosecutions, the Government must and can be highly selective
and, more importantly, can obtain a very high conviction rate because it is so selective. The
message to taxpayers is that, sure we dont try all tax cheats and dont even try all that we know
about, but if we get you in our prosecution cross-hairs, you are dead.
The articulated standard for tax cases is:
In determining whether to authorize prosecution, the Tax Division first considers
whether the admissible evidence is sufficient to sustain a conviction beyond a
reasonable doubt and whether there is, in light of the evidence and the likely
defenses, a reasonable probability of conviction. USAM, 6-4.211. If the threshold
is satisfied, the Tax Division also considers the factors articulated in the Principles
of Federal Prosecution to determine whether a prosecution would be an appropriate
use of prosecutorial resources. USAM, 9-27.220, et seq. The exercise of
prosecutorial discretion in tax cases is guided by the same standards applicable in all
other federal criminal prosecutions. Prosecution may be declined if no substantial
federal interest would be served by prosecution, the person is subject to effective and
adequate prosecution in an another jurisdiction, or there exists an adequate
non-criminal alternative to prosecution. USAM, 9-27.220, et seq.1190
Reasonable probability of conviction probably understates the quality of case the DOJ Tax
requires. The conviction rate is very high indeed. The statistics should suggest that DOJ Tax brings
charges in cases it feels it has almost a slam dunk to win.
How do these statistics play into the Governments goal for its criminal enforcement program
to support general tax compliance? Do you think it is better to have less than 2,000 prosecutions
1189
Richard A. Posner, An Economic Approach to the Law of Evidence, 51 Stan. L. Rev.

1477, 1506-1507 (1999) (footnotes omitted).
1190
CTM 1.04[2][a] (2008 ed.).
- 484 -
where the conviction rate is 90% than to bring 10,000 prosecutions where the conviction rate is
50%? Certainly, with the higher number of prosecutions and lower conviction rate, the Government
puts more tax cheats in jail. But, then the message to the public would be that, if the Government
even decides to prosecute, there is a 50% chance to beat the rap. With the lower number of
prosecutions and higher conviction rate, as noted above, the message is that, if we get you in the
cross-hairs, you are dead (or 90% dead, anyway). From the Governments perspective, not only is
that a better message to the taxpaying (or, more precisely, nontaxpaying public), it consumes less
of the countrys limited investigation, prosecution, judicial and prison and related resources. With
a conviction rate of 50% because of less stringent selectivity, more cases would go to trial. But,
with the higher standards and conviction rate now obtained, there is significantly less drain on the
countrys limited judicial resources and indeed the prosecution resources. For the Government as
a whole, fewer cases and greater selectivity (chance of conviction) is win-win.
What does this mean? It should mean, for example, that, if you can convince the
Government that it has only a 51% chance of convicting your client in a specific tax case, the
Government should not even prosecute. In order to keep its high percentage up (say at the 90+%
level), statistically the Government would have to bring 8 100% chance of convicting cases for
every 50% case it decided to prosecute. So, in theory, absent some other factor (lets call it the
Capone factor where there is some need to convict other than only tax imperatives), the Government
should not bring the 51% case. Wheres the break point? That depends upon how many cases the
Government will bring that have a much higher than 90% chance (so as to support some cases below
the 90% level). But, the Government probably will not bring a criminal prosecution in a garden
variety tax case unless it assesses it chances of getting a conviction at 75 or 80%+. Of course, cases
are hard to assess in this percentage fashion, but all lawyers assess cases in broad strokes in that
way. Thats how settlements are achieved in civil cases, and plea bargains struck in criminal cases.
But before you get to that stage, you will want to advocate that the Governments chances of
prevailing are sufficiently lower than the critical 90% benchmark that the Government should not
be even pursuing an indictment.
V.
DOJ Tax Control of the Criminal Enforcement System.
I noted above that DOJ Tax retains control over criminal prosecution of tax crimes.
Centralization and coordination is an imperative based upon the goal of the criminal tax system to
support general tax compliance.1191 This control is necessarily inherent in the processing of tax
criminal investigations from CI through DOJ Tax. Thus, although the IRS usually investigates tax
crimes, DOJ determines which among those investigated will be prosecuted.
Tax crimes may, however, come into the Governments cross-hairs in other ways where the
IRS and DOJ Tax may not be in the direct chain of administrative processing. For example, a drug
task force may desire to charge tax crimes incidental to the drug crimes it charges against a target
of the investigation, perhaps based on the Capone factor noted above (i.e, thats the only way we can
get the bastard). (For this purpose, even if a conviction on the drug charges could be obtained, the
tax crime will not be grouped with the drug crimes and thus could have an enhancing effect on
1191
CTM 2.00 (2008 ed.), including USAM 6-1.110 and 6-4.010.
- 485 -
sentencing under the guidelines.) The prosecutor(s) on drug task must seek DOJ Tax approval to
charge tax crimes.1192 Further, in order to preserve its authority over tax crimes, DOJ Tax also has
authority over Title 18 crimes related to tax crimes -- such as mail fraud where the criminal act is
the mailing of a return or form to the IRS.1193
The following is excerpted from an article written by Mark Matthews, former Deputy
Assistant Attorney General in charge of DOJ Taxs CES.1194 The purpose of the article is to explain
the Tax Divisions function to local Assistant United States Attorneys who approach tax cases in
a different way than does the Tax Division. The acronyms used in the article are: USAO for U.S.
Attorneys office, the division of DOJ that is the local representative of the United States (e.g., the
U.S. Attorney for the Southern District of Texas); and AUSA for Assistant U.S. Attorney, the line
level attorney in the USAO that tries criminal and civil cases in the district. The article addresses
concerns that usually arise when an AUSA is conducting a separate criminal investigation and has
the opportunity to add a tax count or even may feel that a tax count is the only way to nail a bad guy
(a la Al Capone). The AUSA is not free to add tax counts just to further other goals. The article
also addresses the situation where the Tax Division has authorized one or more tax counts, has
designated which counts are appropriate for a plea, and the AUSA believes that some other plea may
be appropriate based on his or her view of the case.
The Tax Divisions criminal sections provide two basic criminal litigation
roles: one is very popular; the other often decidedly unpopular. The popular role [is]
direct and indirect litigation assistance to United States Attorneys offices (USAOs)
* * *. [T]he Tax Division provides very welcome and user friendly litigation
assistance and expertise in evaluating and litigating tax cases. In fact, AUSAs are
often thankful for the Tax Division attorney who is willing to wade into the mounds
of paper in a complex tax case or the piles of frivolous motions filed by an illegal tax
protester and for his or her contributions to the indictments, convictions, and
sentences generated by complex tax litigation. * * * *
The more difficult aspects of our relationship arise in the review process.
This second, occasionally contentious, role is critical to the Tax Division, but is often
dreaded by the AUSA and [IRS] case agent. The congenial relationship between the
Tax Division and the local United States Attorney begins to deteriorate when we find
it necessary to decline a case or a particular count or defendant. It becomes
particularly more contentious when we decline to authorize a plea to a tax charge,
which you believe would greatly simplify some difficult case in your district. This
article attempts to explain what you might perceive as a schizophrenic Tax Division.
How did the Division that produced an aggressive litigator who tried that difficult
1192
CTM 2.00 (2008 ed.), including USAM 6-4.218.

CTM 2.00 (2008 ed.), incorporating USAM 6-4.210; see also CTM 3.00 (2008 ed.),
incorporating Directive No. 128 quoted at p. 238.
1194
Mark Matthews, Through the Looking Glass: Reconciling the Mission of the Tax
Division with the Goals of the United States Attorneys Offices in Tax Prosecutions, 46 USA
Bulletin (No. 3) 7 (April 1998).
1193
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case for your district last year become such a meticulous, cautious reviewer, pointing
out the problems in your case this year?
In the review process, the Tax Division spends a lot of time listening to the
concerns of AUSAs regarding the how tos of handling tax cases and dedicates a
lot of energy to figuring out ways to make cases fit within Tax Division guidelines
and meet the AUSAs goals as well. Frankly, as a former AUSA, I think I can safely
attest that, in relation to handling the complexities of a tax investigation and weighty
case load, AUSAs dont spend much time worrying about the Tax Divisions mission
and concomitant problems. I hope that this article will provide a useful perspective
for you or, at a minimum, help you to better evaluate your tax cases chances in the
Tax Division.
The Tax Division review process can only be understood in terms of our
mission. In all of law enforcement, we represent the extreme of general deterrence.
We are trying to deter more taxpayers (over 200 million) with fewer prosecutions
(approximately 1,500) than any other area of law enforcement. And, unlike other
areas of law enforcement where the goal is usually to stop clearly unlawful conduct,
we in the tax administration business have the goal of influencing hundreds of
millions of Americans to take the affirmative steps of completing and filing often
complex tax returns and making substantial payments to Uncle Sam.
This is a difficult mission by any measure, and we work hard to enforce
compliance while ensuring uniform, fair enforcement in order to generate confidence
in the system. One measure of our success is the tax gap, which is the difference
between what should be reported as owing and paid to the Government each year
versus what is actually reported and paid. That figure is currently estimated to be
approximately $100 billion per year. The Internal Revenue Service (IRS) estimates
that the compliance rate is approximately 83 percent.
This tax gap is what causes us to place such a premium on every criminal tax
case. Each tax case must be used to deter people who cheat or are willing to cheat
on their taxes, but against whom we do not have the resources to investigate or
prosecute. In these circumstances, it is easy to understand why we consider a tax
case that is not publicized in any way a waste of resources. Even worse is a tax case
that, if publicized, would undermine the voluntary compliance system. That can
occur when the public perceives that the tax code has been used unfairly in some
case, or more frequently, when the case and result is such that the public will
perceive that perpetrators of tax crimes receive only a slap on the wrist, implying that
tax crimes are somehow less serious than other Federal cases.
It is this phenomenon that sometimes challenges the relationship between a
USAO and the Tax Division. The USAO tends to view a case through a more
narrow lens than the Tax Division. The AUSA is concerned with effectuating
substantial justice vis-a-vis a particular defendant in a particular factual
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circumstance. While those concerns are important to the Tax Division as well, we
are much more focused on the impact the case will have on the public at large and
tax compliance more generally. The AUSA may have a more acute understanding
of the judge selected to handle the tax case or the likely reactions of local jurors to
particular facts and witnesses. Therefore, the USAO frequently comes to the Tax
Division with particular plea or charging proposals based on their view of the case,
the judge, and the defendant and his or her attorney. We are often presented with a
view that a particular course is the most appropriate or best the Government can
achieve under the circumstances. We give great deference to those views, and in the
vast majority of cases, come to agreement without much difficulty. The problem
comes when we conclude that, despite the great weight given local views, the
proposal is unacceptable because of its potential to undermine tax compliance and
uniformity.
The most dramatic example of this tension arises when a Title 18
investigation has become more complex than anticipated, and the Government is
looking for an efficient and just way to dispose of the case. (Many criminal chiefs
reading this will probably believe I am describing their case, but I promise that I
have no particular case in mind). In this often-repeated theme, a Title 18
investigation has begun and perhaps even been indicted with great prospects. The
IRS is probably not involved in the case or is the tail on the dog of a much bigger
case. In many instances, the Title 18 investigation or prosecution has received media
attention, perhaps based, in an indicted case, on a press release announcing the
Governments great efforts to address a particularly grave circumstance.
Unfortunately, something has happened on the way to the jury. It could be the death
of a witness; the unavailability of foreign evidence; the appearance of a dubious, but
perhaps convincing alibi; the departure of the lead AUSA in a complex case; etc.
The reason doesnt really matter; we often will agree that a serious problem has
occurred.
The difficulty for the Tax Division occurs when the prosecutor and the
defense attorney come to an agreement that a tax plea is a graceful way out for both
parties. Often, the defense attorney is content with this result because the proposed
sentencing guidelines will allow for an acceptable sentence, frequently probation
or home confinement. We often understand that the proposal, viewed narrowly
within the confines of the particular case, represents the most attractive alternative
from your perspective. But perhaps you can see the dark clouds beginning to form.
When we evaluate this proposal in terms of our tax compliance mission, it presents
us with great difficulty. We face the prospects of having the public perceive that a
more serious Title 18 crime has been disposed of with a tax slap on the wrist.
We can actually write the defense attorneys statement to the media about how the
Government, having utterly failed to prove the false and malicious charges against
his or her client, has brought this technical tax case to which the client has
reluctantly agreed to plead, particularly because no jail time is likely. We are
concerned that taxpayers (who arent committing other Title 18 crimes) will receive
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an erroneous message from this result. They will perceive that if these bad folks
committing other crimes are pursued for tax crimes and receive small sentences, that
they will not be pursued and will certainly avoid any jail sentence. Such a result is
particularly damaging to tax enforcement.
A corollary problem for the Tax Division is thisto endorse the proposed
course means that scarce resources available to prosecute tax crimes will be spent on
a case that actually undermines compliance. A Criminal Investigation Division
(CID) agent will still have to generate a special agents report, and IRS counsel and
Tax Division resources will be spent evaluating the plea. We have spent the last
three years attempting to redress a sharp decline in CID resources directed to tax
enforcement as opposed to narcotics and money laundering crimes. Plea agreements
that do not take into consideration the tax enforcement mission of the Tax Division
undermine these efforts.
As we begin to discuss these concerns with USAOs, we are sometimes
confronted with an incredulous response along the following lines: Would you
rather have us let a criminal go completely free (or run a greater risk of an acquittal
than normal)? I hope you are beginning to anticipate the answer that starts to form
in our minds. From the standpoint of the central mission of the Tax Division, the
answer is yes, we sometimes see a greater harm to tax administration from
accepting that plea than from failing to charge the defendant or from dismissing the
case.
Now, the good news is that we only infrequently face these more dramatic
examples of conflict. Tax Division attorneys work with AUSAs to find a way out
of the dilemma whenever possible. Because we are willing to give substantial
weight to the views and concerns of USAOs, we struggle for alternative solutions or
modifications to cases that will conform to Tax Division guidelines.
Less dramatic cases arise every day, however. We are asked to approve a
failure to file misdemeanor when the facts more clearly show felony conduct. Or we
are asked to approve a tax plea before the factual basis has been developed. Or we
are asked to authorize a Spies evasion when other taxpayers have been charged with
a failure to file on similar facts. These kinds of cases raise not only the issues above
with respect to tax compliance, but also raise another important issue for the Tax
Divisionthe uniform treatment of taxpayers. Given the applicability of our tax
laws to all Americans, it is exceedingly important that they perceive the system as
fundamentally fair. This means that the Government must act uniformly and fairly,
and that, all factors being equal, the taxpayer referred for criminal prosecution in
District A gets the same treatment as the taxpayer referred for prosecution in District
B.
A breakdown in uniform treatment through disparate prosecution decisions,
declinations, or pleas can harm voluntary compliance in other ways. The tax defense
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bar is a close knit group that meets often and exchanges information at the national
level. Actions in one seemingly remote case can quickly wind up being used
affirmatively against the Government in another setting.
This uniform treatment is a hallmark of why the Tax Division was created.
The lack of a nationwide clearinghouse could (and did) generate diverse results that
could undermine tax compliance. You may present what looks like an acceptable tax
charge, but the Tax Division may oppose it on uniformity grounds. It may be that
you propose a case with dollar thresholds substantially below those normally used
by the IRS and the Tax Division. Or you may propose a case where the evidence of
willfulness, while not negligible, differs substantially from the degree of proof we
have required against other taxpayers. Or you may propose a criminal prosecution
in an area of the tax code that has not been criminalized before and where there has
been no antecedent aggressive civil enforcement by the IRS. In all of these
instances, depending on the facts and other circumstances, the Tax Division may be
much less enthusiastic about your case as a matter of fundamental fairness to other
similarly situated taxpayers.
A more dramatic example illustrates the tension. We occasionally see
proposed tax investigations or charges that involve political or other public figures.
The structure of the entire tax review system, including career professionals at the
IRS Chief Counsels office and in the Tax Division, ensures both the reality and the
public perception that individuals charged with criminal tax violations are selected
for the crimes they commit, not because of who they are. No one involved in these
cases wants a case to be, or to be perceived to be, investigated or brought for
improper reasons. The availability of Tax Division review helps prevent either
occurrence.
We occasionally receive comments during a review process that note the
expertise and freedom of USAOs in many other areas of complicated white collar
crimes. We in the Tax Division recognize that expertise and struggle mightily not
to convey the impression that we disagree because we are just wiser. It is simply
that, unlike some USAOs, which at best see a couple dozen tax prosecutions a year,
we see them all. We know precisely how weve handled similar matters in other
districts. It is that experience that we bring to bear in the review process. I am quick
to note, however, that the Tax Division and its prosecution policies have benefitted
greatly from the contribution of AUSAs, particularly a core of very experienced and
committed Federal prosecutors who are very enthusiastic about tax enforcement.
Further, I encourage you to contact the Tax Division in the early stages of a case so
that we can work together to resolve any issues concerning the appropriate
disposition of the case.
My comments are intended merely to explain how different views arise at
times between Federal prosecutors who are dedicated to doing the right thing every
day. Likewise, I hope you have gained some appreciation of the Tax Divisions
- 490 -
mission and the impact of that mission on our prosecution policies. Despite our
infrequent differences, there is no organization more supportive of and thankful for
each USAOs efforts to enhance tax compliance than the Tax Division.
Finally, DOJ Tax CES claims the authority to conduct criminal tax investigations
independent of grand jury investigations and independent of the IRS. That DOJ Tax CES is actually
conducting such investigations is really beyond peradventure, claiming to have done so in at least
the KPMG criminal tax shelter investigation.1195
VI.
Conferences.
A.
CI Conferences.
If the target of the investigation (usually the taxpayer, but may be a preparer or other target)
requests a conference with CI upon completion of its investigation, CI will usually allow the
conference if it has tentatively decided to refer the case to DOJ Tax.1196 Generally, the conference
must be formally requested by the target or his counsel, although I have had Special Agents suggest
that a conference should be requested. And, at the option of the SAC, the taxpayer or his counsel
will be offered a conference.1197 A CI conference is not available if a grand jury is investigating of
the SAC determines that a conference is not in the best interests of the Government.1198
The purpose of the conference is to permit the targets counsel to make any arguments and
present any facts he may have to convince the IRS the case should not be referred to DOJ Tax with
a recommendation for prosecution. The conference will be attended by the SAC or his designee,
At the conference, CI will generally provide an oral statement of certain basic information for which
a prosecution recommendation is being considered.1199 Practically, this means that CI will advise
of the charges, the years and the tax loss numbers involved. Notwithstanding that the conference
is not offered to allow discovery of the Governments case, the astute practitioner may learn a good
deal from the disclosures the IRS does make and from the nature of the questions they ask.
1195
One of the authors of this text is not convinced that DOJ Tax has the authority it
claims. He could find no express grant of authority to DOJ Tax CES and, upon inquiry, DOJ Tax
cited none. The claim apparently arises under some notion of general authority residing in DOJ to
conduct criminal investigations. But, there are seeming authoritative statements inconsistent with
that claimed authority. For example, the Webster Report and various TIGTA reports state
unqualifiedly that IRS CI is the only law enforcement organization with the authority to investigate
criminal tax violations. This author has discussed this issue in two blogs on his Federal Tax Crimes
blog: DOJ Tax Division Criminal Investigation Authority (6/5/09) and Even More on DOJ
Authority to Investigate Tax Crimes. (7/20/2010).
1196
See generally IRM 9.5.12.3.1 -4 (7-25-2007).
1197
IRM 9.5.12.3.3 Scheduling the Taxpayer Conference (07-25-2007).
1198
IRM 9.5.12.3.1 Taxpayer Conference Procedures (07-25-2007).
1199
IRM 9.5.12.3.4 Conducting the Taxpayer Conference (07-25-2007).
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Many practitioners view the conference as a mere formality in terms of really trying to
convince CI to change its mind. By that time, CI will have done a lot of work and is not likely to
change its recommendation barring some blockbuster countervailing evidence. Even if the counsel
for the target has such evidence, he may be loathe to play his hand at that stage. And, except in the
rare case, such blockbuster evidence and arguments are not usually available. Instead, the targets
counsel usually has various threads of evidence and arguments that might ultimately be persuasive
at trial (particularly if the Government has not fully anticipated them), and is reluctant to play his
hand at that stage for fear that CI will not be persuaded and CI and DOJ Tax will then be prepared
to anticipate and deal with the defenses.
Many practitioners will nevertheless pursue a CI conference even while keeping their cards
close to the vest in order to discover as much as possible about the CI case. Of course, the careful
practitioner will have tracked the CI investigation from the beginning and will likely know more
than CI knows and, equally important, will know the information that CI knows and therefore will
have a good idea of the basis for the criminal recommendation. But the practitioner might still want
to get a better feel for what is motivating CI. A carefully orchestrated CI conference sometimes
permits the practitioner this type of additional discovery. The practitioner may thus make a
presentation that really offers CI nothing more than it already knew and gives no insight into the
targets defenses, but by playing back what the IRS already knew and making the obvious arguments
(i.e., the ones that would not have escaped CI anyway), the practitioner may flush out comments and
questions from the CI representatives that give significant insights into their thinking and the shape
of the recommendation that will be made. This can then be invaluable in marshalling the targets
defenses in the later stages of consideration and in the trial.
B.
DOJ Tax Conferences.
CES, the criminal enforcement section of DOJ Tax, will also generally grant the targets
representative a conference prior to authorizing prosecution.1200 From the practitioners perspective,
the conference offers an additional opportunity to make the case for declining to prosecute, this time
with parties (the DOJ Tax CES attorneys) who do not have a substantial investment in the case and
can take a more objective view of the case than could CI. From DOJ Taxs perspective, it would
like to hear of any prosecution problems the case may present before they seek indictment and try
the case. If the practitioner has good stuff that is persuasive as to why the case is not within DOJ
Taxs criminal enforcement priorities, this is the time to present them.
The targets representative will be provided in advance only limited information basically
the same information that CI provides with any adjustments that DOJ Tax may then think is
appropriate. However, as with the CI conference, in the give and take of the DOJ Tax conference
when it is working at its best, the practitioner may learn a lot about the underlying case.
1200
CTM 3.00 (2008 ed.), quoting Tax Division Dir. No. 86-58, dated 5/14/86. See also
CTM 2.00 (2008 ed.) incorporating USAM 6-4.214; see also DOJ CTM DIR. 86-58, regarding
conferences.
- 492 -
In some cases, the CES conference can result in DOJ declining to pursue the case. That does
not happen often (I have had it happen once), but still in the right case this is an opportunity to be
pursued.
If the CES attorney tries the case, there will be opportunities in the pre-trial phase and even
pre-indictment phase for the practitioner to dialogue with that attorney as prosecutor to further
develop information and initiatives in the clients best interests.
C.
Conferences with AUSA.
Many tax cases are tried by AUSAs in the local United States Attorneys Office rather than
DOJ Tax Attorneys. The targets attorney will usually have an opportunity to meet with the AUSA
to try to thwart the prosecution or confine its scope, although such a meeting is within the discretion
of the AUSA. This meeting might offer the best opportunity to discover at least some of the
Governments case. And, in some cases, dialog with the AUSA can help the AUSA decide whether
he or she should pursue the case or refer it back to CES for either further consideration or
assignment of a CES attorney to conduct further proceedings, either of which may result in the case
not being prosecuted.1201 I have also had this happen.
Similarly, there will be opportunities in the pre-trial phase and even pre-indictment phase
for the practitioner to dialogue with the AUSA as prosecutor to further develop information and
initiatives in the clients best interests.
D.
Target Attendance; Admissions and Vicarious Admissions; Leads.
The target of the investigation may attend any of these conferences. The question you must
ask as the practitioner is whether it is useful for the client to attend. That determination can only
be made in the context of the specific facts of the case. I think the consensus among counsel is that
the targets presence is generally not helpful and presents unacceptable risks.
Damaging statements by a target may be used against him or her in the criminal trial.1202
Accordingly, in the couple of instances that I have had a target attend a conference, I have carefully
coached them to generally keep their mouths shut except as to statements where I have carefully
choreographed them. Another danger of the targets presence is where, even while remaining silent,
his or her body language in the give and take of the discussions may damage the attorneys
presentation. (I also coach them to avoid damaging body language.) Bottom line, without some
affirmative and overwhelming good reason to have the target present, I believe that it will just not
be helpful and may be damaging. Dont do it (generally).1203 And, in recognition of the problems
1201
1202
See CTM 2.00 (2008 ed.), referring to USAM 6-4.245, A.

CTM 2.00 (2008 ed.), referring to USAM 6-4.214, which in turn cites FRE Rule
801(d)(2).
1203
As I say in the text, this is fact specific and, in one case, I advised my client to submit
to questioning with a court reporter present at a DOJ Tax CES conference after the preliminary
decision had been made to seek an indictment. Needless to say, I knew my case well and used my
- 493 -
presented, CES policy at the stage of reviewing a recommendation to prosecute is to discourage such
presentations by the target or a third party witness.1204
The more difficult question deals with the concept of vicarious admissions. Basically,
upon some notion of agency law, admissions or damaging statements made by an agent can be
used against the principal. Specifically, if the attorney makes the admission or damaging statement,
can or will the admission or damaging statement then be used against the client (in this context, the
target of the investigation)? As a general matter, that is a significant risk. In the criminal tax
context, IRS CI insists that in conferences with CI this is a risk that should be taken seriously.1205
DOJ Tax CES, however, has made the policy decision that vicarious admissions made by an
attorney will not be used in criminal prosecution.1206
Investigative leads are another matter, however. As with proffer sessions generally (which
these sessions resemble), the Government insists upon the right to exploit any leads developed in
the conference.1207 As to the vicarious admission, therefore, this policy serves like use immunity
rather than derivative use immunity.
E.
No Right to a Conference.
The IRS and DOJ Tax CES conferences are offered as a matter of Government general
practice. The conferences, however, are not matters of right and, therefore, the Government may
indict without offering the conferences.1208
clients testimony to present the defense that I knew was solid. At the end of my clients case, it was
clear that the DOJ Tax CES attorney did not know his case (i.e., he had not mastered the hundreds
of thousands of documents) and I had continually insisted that he clean up his questions to ask about
the real facts rather than the ones he made up. At the end of the testimony, the DOJ Tax CES
attorney stated on the record (with the court reporter still going) that there would be no indictment
of my client and, indeed, there was none. I have never heard of anyone doing this before.
1204
Tax Div. Dir. 86-58, quoted in CTM 3.00 (2008 ed.), at (4), stating that such
attempts should be discouraged, since the Tax Division is conducting a review of an investigation
and is not conducting either a hearing or an investigation.
1205
IRM 38.2.1.4.14 Conducting the Conference (08-11-2004), citing FRE Rule
801(d)(2)(C).
1206
Tax Division Directive No. 86-58, in CTM 3.00 (2008 ed.); see also CTM 2.00 (2008
ed.), quoting USAM 6-4.214. The damaging admission may be used in making CESs determination
whether to prosecute and thus, in a case CES might have otherwise viewed as close, may tip the
prosecutorial judgment call in favor of prosecution.
1207
CTM 2.00 (2008 ed.), referring to USAM 6-4.214.
1208
United States v. Ohle, 678 F.Supp.3d 215, 233 (SD NY 2010).
- 494 -
VII.
Deferring Completion of Civil Tax Initiatives.

A.
General.
I noted elsewhere that, when a civil tax agent (a revenue agent) conducting a civil audit has
a firm indication of fraud, the revenue agent will suspend further development of the audit, will
prepare a referral of the matter to CI, and nothing further will happen on the civil side until the
criminal referral is resolved either by a prosecution or a declination, either of which will result in
control of the case being returned to the examination function for completion of the audit and
implementation of civil assessment procedures. This means that, at least historically, the criminal
case takes priority over the civil case. This historical approach may be mitigated somewhat by a
recent policy in favor of at least some parallel proceedings. (See the discussion beginning at p. 432.)
Taxpayers who have been targeted in a criminal investigation will often want to just pay up
whatever the Government says they owe and move on -- in the fantasy that the payment of the tax
will cause the criminal problem to go away. It wont. The criminal investigators and prosecutors
really dont care whether the taxpayer ever pays the tax. They want their criminal pound of flesh.
So payment of the tax simply wont technically deflect a criminal investigation or prosecution.
However, in appropriate cases, payment may permit the taxpayer to urge that he really wanted all
along to pay the taxes that he owed and when first advised that he may have underpaid, moved
promptly to pay. The Government cannot generally accept that as a resolution of the criminal case
because every target would simply pay the tax. The criminal enforcement program would be gutted,
with every taxpayer cheating to his or her hearts content with the idea that, if caught, he or she
simply pays up any taxes, penalties and interest. This would dramatically tilt the risk/reward ratio
in tax evasion in favor of the taxpayers. So that simply cannot happen.
B.
Civil Settlements in Plea Agreements.
This has been discussed above.1209

VIII. Prosecutorial Discretion Policies.
A.
Introduction.
The Government is not required to prosecute persons whom it believes has violated the
law.
Certainly, in the tax context, as previously noted, only a very small percentage of persons
who are known or reasonably suspected by the Government to have committed some type of tax
crime are investigated and prosecuted. Judgment calls are made from the first discovery of
information that would indicate a tax crime (such as, to use the most mundane example, a failure to
1210
1209
See p. 387.
See e.g., Michael Edmund O'Neill, When Prosecutors Don't: Trends in Federal
Prosecutorial Declinations, 79 Notre Dame L. Rev. 221 (2003) (discussing some of the factors that
enter the decision as to whether to prosecute and which crimes to prosecute).
1210
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file a return) through prosecution, if it gets that far, as to whether the case presents a fact pattern that
is consistent with charging and prosecuting the crime.
If the IRS discovers the potential crime and chooses not to investigate or prosecute, the DOJ
will likely never have any information about the matter and will not prosecute. If the IRS does
investigate and refer the case to DOJ or DOJ otherwise discovers the tax crime, DOJ will then have
to make a prosecutorial judgment call as to whether to investigate or investigate further with a view
to possible prosecution and, upon completion of its investigation, whether to prosecute.1211 That
requires a judgment call that goes to the heart of the prosecution function in our system.
DOJ has wide latitude in determining which cases to investigate and prosecute.1212 In this
section, I introduce certain of the issues that arise when DOJ considers exercising its discretion in
tax and related cases. As I discuss, the DOJs policies with regard to the exercise of its discretion
are reflected in the USAM and various memoranda issued from time to time to guide its prosecutors.
B.
DOJ Charging and Plea Policies

1.
General DOJ Policies.
The general guidelines for the exercise of the prosecutors discretion are found in USAM 927.000 (Principles of Federal Prosecution) and 9-28.000 (Principles of Federal Prosecution of
Business Organizations) and reflected in a May 19, 2010 Memorandum from Attorney General
Holder.1213 I quote here key portions of the Holder memo:
The reasoned exercise of prosecutorial discretion is essential to the fair,
effective, and even-handed administration of the federal criminal laws. Decisions
about whether to initiate charges, what charges and enhancements to pursue, when
to accept a negotiated plea, and how to advocate at sentencing, are among the most
fundamental duties of federal prosecutors. For nearly three decades, the Principles
of Federal Prosecution, as reflected in Title 9 of the U.S. Attorneys' Manual, Chapter
27, have guided federal prosecutors in the discharge of these duties in particular and
in their responsibility to seek justice in the enforcement of the federal criminal laws
in general. The purpose of this memorandum is to reaffirm the guidance provided by
those Principles.
1211
DOJ Tax claims the authority to investigate tax crimes independent of the IRS and
independent of a grand jury investigation. I am not sure it has that authority but have not had the
time to chase that down. I did ask DOJ Tax for its authority and what it sent back was not authority
to investigate tax crimes, so I remain unconvinced. DOJ Tax may have that authority, but they
certainly seem to avoid telling what it is.
1212
USAM 9-27.110. For a discussion of some ethical guidelines and prudential
considerations that might apply in the exercise of prosecutorial discretion, see Amie N. Ely,
Prosecutorial Discretion As an Ethical Necessity: The Ashcroft Memorandum's Curtailment of the
Prosecutor's Duty to Seek Justice, 90 Cornell L. Rev. 237 (2004).
1213
Memo dated May 19, 2010.
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Persons who commit similar crimes and have similar culpability should, to
the extent possible, be treated similarly. Unwarranted disparities may result from
disregard for this fundamental principle. They can also result, however, from a
failure to analyze carefully and distinguish the specific facts and circumstances of
each particular case. Indeed, equal justice depends on individualized justice, and
smart law enforcement demands it. Accordingly, decisions regarding charging, plea
agreements, and advocacy at sentencing must be made on the merits of each case,
taking into account an individualized assessment of the defendant's conduct and
criminal history and the circumstances relating to commission of the offense
(including the impact of the crime on victims), the needs of the communities we
serve, and federal resources and priorities. Prosecutors must always be mindful of
our duty to ensure that these decisions are made without unwarranted consideration
of such factors as race, gender, ethnicity, or sexual orientation.
Charging Decisions: Charging decisions should be informed by reason and
by the general purposes of criminal law enforcement: punishment, public safety,
deterrence, and rehabilitation. These decisions should also reflect the priorities of the
Department and of each district. Charges should ordinarily be brought if there is
probable cause to believe that a person has committed a federal offense and there is
sufficient admissible evidence to obtain and sustain a conviction, unless "no
substantial federal interest" would be served, the person is subject to "effective
prosecution" elsewhere, or there is "an adequate non-criminal alternative to
prosecution" [USAM 9-27.200 et seq.).
Moreover. in accordance with long-standing principle, a federal prosecutor
should ordinarily charge "the most serious offense that is consistent with the nature
of the defendant's conduct, and that is likely to result in a sustainable conviction"
[USAM 9-27.300]. This determination, however, must always be made in the context
of 'an individualized assessment of the extent to which particular charges fit the
specific circumstances of the case, are consistent with the purpose of the Federal
criminal code, and maximize the impact of Federal resources on crime [USAM
9-27.300]. In all cases, the charges should fairly represent the defendant's criminal
conduct, and due consideration should be given to the defendant's substantial
assistance in an investigation or prosecution. As a general matter, the decision
whether to seek a statutory sentencing enhancement should be guided by these same
principles. All charging decisions must be reviewed by a supervisory attorney. All
but the most routine indictments should be accompanied by a prosecution
memorandum that identifies the charging options supported by the evidence and the
law and explains the charging decision therein. Each office shall promulgate written
guidance describing its internal indictment review process.
Plea Agreements: Plea agreements should reflect the totality of a defendant's
conduct. These agreements are governed by the same fundamental principle as
charging decisions: prosecutors should seek a plea to the most serious offense that
is consistent with the nature of the defendant's conduct and likely to result in a
- 497 -
sustainable conviction, informed by an individualized assessment of the specific facts

and circumstances of each particular case. Charges should not be filed simply to
exert leverage to induce a plea, nor should charges be abandoned to arrive at a plea
bargain that does not reflect the seriousness of the defendant's conduct. All plea
agreements should be consistent with the Principles of Federal Prosecution and must
be reviewed by a supervisory attorney. Each office shall promulgate written guidance
regarding the standard elements required in its plea agreements, including the
waivers of a defendant's rights.
Advocacy at Sentencing: As the Supreme Court has recognized, Congress has
identified the factors for courts to consider when imposing sentences pursuant to 18
U.S.C. 3553. Consistent with the statute and with the advisory sentencing
guidelines as the touchstone, prosecutors should seek sentences that reflect the
seriousness of the offense, promote respect for the law, provide just punishment,
afford deterrence, protect the public, and offer defendants an opportunity for
effective rehabilitation. In the typical case, the appropriate balance among these
purposes will continue to be reflected by the applicable guidelines range, and
prosecutors should generally continue to advocate for a sentence within that range.
The advisory guidelines remain important in furthering the goal of national
uniformity throughout the federal system. But consistent with the Principles of
Federal Prosecution and given the advisory nature of the guidelines, advocacy at
sentencing-like charging decisions and plea agreements must also follow from an
individualized assessment of the facts and circumstances of each particular case. All
prosecutorial requests for departures or variances-upward or downward must be
based upon specific and articulable factors, and require supervisory approval. Each
office shall provide training for effective advocacy at sentencing.
2.
DOJ Tax Policies.

a.
General.
DOJ Tax policies must conform to the DOJ policies noted above, but where appropriate
reflect the special concerns of the role of criminal enforcement in overall tax compliance. For
example, it is recognized that all persons identified as in some way violating the criminal tax laws
simply cannot be prosecuted. Choosing who will be prosecuted is a judgment call to be made based
on the resources of the Government (including the courts) that would be involved to investigate,
consider for indictment, indict and try through final conviction or acquittal. Thus, simply stated, in
the process many identified tax crooks simply get a free ride. This often happens within the IRS and
DOJ is never involved, so compliance with the DOJ policies noted above is not the issue. But, I
have the feeling that it happens, perhaps to a lesser extent, in DOJ Tax also in considering
recommendations to prosecute for tax crimes (whether generated by the IRS or internally in DOJ
via other investigations or even tax grand jury investigations). So it is important to understand the
role of criminal enforcement in the tax system and the priorities impelling a low prosecution and
high conviction rate. DOJ Tax does have special policies which, in context, may be justified
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variations on the foregoing policies. I have covered a number of these policies elsewhere in the text
(e.g., DOJ Tax plea policies)1214 and do not repeat them here.
b.
Sentencing Policies.
(1)
Incarceration.
The CTM provides: Normally, the government attorney in a tax case should not recommend
that there be no period of incarceration.1215 The USAM has a similar, but differently worded,
provision.1216
The reasons for preferring jail time was explained by Mark Matthews, chief of CI in an
interview as follows:
BNA:
How important to CI is it that the defendant receive a jail sentence?
Matthews:
We certainly dont believe that a jail sentence is necessary in every one of our
cases, but we do believe that our deterrence mission is most effective on cases in
which jail time is warranted and is imposed by a judge. The problem if our cases
dont get jail sentences is two-fold. First, we find the press is less likely to report on
that story or give it prominent placement if there is no jail sentence. That, of course,
makes it difficult to communicate the deterrence message. Second, we think that it
sends a different message to the rest of the taxpayers. Rather than hearing that
someone received home detention or probation for tax evasion, we think it sends a
stronger deterrence message if they have to serve some time in prison. That
reinforces the message that tax crimes are serious offenses. Remember, we need to
reach two audiences with our cases -- not only those tempted to cheat, but the
majority of Americans who are honestly trying to fill out their tax returns and who
are writing what may be a difficult check on April 15. We want them to know we are
paying attention and addressing the relatively small percentage of the people who are
cheating with meaningful penalties.1217
The general policy announced in the CTM to generally resist sentences without some
incarceration is harsh in some cases, and Matthews comments recognize that it should not apply
in all cases.1218 It is poor grace for the Government, which after all should temper mercy with
1214
See discussion beginning p. 386.

DOJ CTM 43.12 (2008 ed.).
1216
USAM 6-4.340: the Tax Division prefers that government counsel request the
imposition of a jail sentence in addition to the fine, together with costs of prosecution.
1217
Myrna Zelaya-Quesada, Matthews Explains Role of Criminal Investigation Unit,
Discusses Goals, and Introduces Tool for Informing Public, 58 DTR J-1 (2001).
1218
The USAM does contain a limited exception to this general policy permitting an
AUSA to recommend probation where the defendant is in 0-6 month sentencing range and the
1215
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justice, to urge incarceration in all tax cases. So, how does the Government make exceptions to the
CTM general policy? Always, of course, on a case by case basis. The AUSA may simply ignore
the policy (or maybe even not be aware of it). More likely, the AUSA may find a way to signal to
the court that, while the Government will not formally recommend no incarceration, the Government
would not oppose no incarceration. The sentencing court may perceive that signal to be as good as
a recommendation.
(2)
Departures and Variances.
Tax Division attorneys may not seek departures or variances without approval.1219 Textually,
this approval requirement does not apply to AUSAs prosecuting tax cases.
C.
DOJ Policies on Charging Corporations and Other Entities.
Entities such as corporations generally can be charged with crimes.1220 Entities cannot,
however, be incarcerated. Apart from capital punishment (which also cant be imposed on
corporations), incarceration has historically been considered as the strongest punishment and
deterrent available in the criminal law.1221 Entities can be fined and punished severely with fines,
AUSA personally signs a memorandum identifying the circumstances justifying probation. USAM
6-4.340 (updated September 2007).
1219
CTM 43.12[1] (2008 ed.).
1220
At common law, breathless, lifeless corporations could not be charged with crimes.
In N.Y. Cent. & Hudson River R.R. Co. v. United States, 212 U.S. 481, 494 (1909), the Supreme
Court held that corporations could be criminally liable for the acts of agents. see also United States
v. Sun-Diamond Growers of Cal., 138 F.3d 961, 970-71 (D.C. Cir. 1998), aff'd on other grounds,
526 U.S. 398 (1999) (citing cases). For modern expansion of this concept to collective knowledge
of the entity in the Bank Secrecy Act context, see United States v. Bank of New England, 821 F.2d
844, 856 (1st Cir. 1987). One of the former Enron prosecutors summed it up nicely: The legal rule
is that if an agent of the organization committed a crime within the scope of employment, meaning
basically while doing his job, and acted with even a partial intent to benefit the organization - in
other words, not exclusively for self-interest, then the organization is criminally liable, full stop,
Samuel Buell quoted in Jonathan D. Glater and Lynnley Browning, Deal Likely to Let KPMG Avoid
Charge in Tax Case, New York Times (8/11/05). Notwithstanding this general rule of criminal
prosecution for corporations, corporations cannot be tried for some crimes. For example, Title 18
perjury requires a false statement under oath. Corporations cannot make statements under oath;
people do. Accordingly, the corporation cannot be tried for perjury, but the corporate agent (officer
or director) so testifying can be tried for perjury. Thus, in the case of Section 7206(1) tax perjury,
we know from Ingredient Technology that a corporation can be charged and convicted because the
statute defines the crime as a false statement made under oath by a person which is defined to
include corporations.
1221
This is a justification for the generally higher level of maximum fines for entities
under the Code. For example, under Section7201, individuals can be fined up to $100,000 per
count, whereas corporations can be charged $500,000. 18 U.S.C. 3571 (sometimes referred to as
the Criminal Fine Enforcement Act of 1984 (P.L. 98-596) (CFEA) provides a maximum fine of
- 500 -
but the costs of the fines may be borne by shareholders or, perhaps in severe cases, even the
creditors who may be wholly innocent of the wrongdoing. And, as we learned with Arthur
Andersen in the Enron debacle, mere indictment of a serious crime can be a virtual death penalty
for some entities. Indictment and conviction can severely affect other entities (e.g., those doing
major business with the federal government), even where it is not fatal to them. Accordingly, when
and how to prosecute corporations is an important policy issue. The policy issues are addressed both
in how DOJ exercises its prosecutorial discretion as to entities and how courts sentence entities upon
conviction. I addressed the latter in discussing the Sentencing Guidelines and deal here with
prosecutorial discretion.
The DOJ has had for some time now a policy statement titled Principles of Federal
Prosecution of Business Organizations to guide prosecutors.1222 The guide originally appeared in
1999 via a memorandum by then Assistant Attorney General Holder. That memorandum became
commonly known as the Holder Memorandum. The Holder Memorandum was subsequently revised
and updated by AAG Thompson and reissued in 2003. This memorandum became commonly
known as Thompson Memorandum. The Thompson Memorandum advised that the Tax Division
has a strong preference for prosecuting responsible individuals, rather than entities, for corporate
tax offenses.1223 As with the mentality that people, not guns, kill, so too people, not lifeless,
breathless and soulless juridical entities, commit crimes. But, despite the words quoted, the
prosecutorial mentality changed in the aftermath of Enron and the corporate excesses of the late
1990s and early 2000s. Prosecutors became far more aggressive in attacking the evil they perceived
and began to use and abuse the power to indict to enlist entities at risk of indictment in getting the
evil individuals it perceived as the culprits.
The classic example of taking this raw power to the extreme occurred in the investigation
by the United States Attorneys Office for the Southern District of New York into alleged tax shelter
abuses by KPMG partners and former partners, as well as others allegedly in league with them.
With the explicit or implicit threat of the Thompson Memorandum, the prosecutors held over KPMG
the threat of indictment, which, as with Arthur Andersen, would have been a death sentence for the
firm, and ultimately extracted a deferred prosecution agreement (DPA) including an obligation
for KPMG to pay the Government $456 million. Whether or not effectively extorting the DPA upon
threat of an indictment death penalty was an abuse of raw power, that threat alone did not rise to the
level of a major constitutional abuse. But, the prosecutors had gone way beyond extracting that
DPA. Flaunting the power to impose a death sentence by indictment, the prosecutors earlier cowed
KPMG into taking actions detrimental to partners and former partners. KPMG became virtually an
investigative arm of the prosecution in gathering information damaging to its partners and former
partners. But that alone also on its face did not have constitutional ramifications. What did have
constitutional ramifications was the prosecutors cowing KPMG into (1) waiving its attorney-client
$250,000 for an individual but $500,000 for a corporation. Similar recognition of the unavailability
of incarceration is found in the Sentencing Guidelines discussed earlier in this text.
1222
USAM 9-28.000.
1223
III.B.
- 501 -
privilege1224 and (2) more immediately damaging to real live people, withdrawing attorney-fee
support for any of its partners or former partners who, in the prosecutors euphemism, did not
cooperate that is, those who either exercised their Fifth Amendment privilege or the functional
equivalent of declining to be interviewed by the prosecutors. (At the behest of the prosecutors,
KPMG fired any partner who did not cooperate and KPMG refused to provide them documents
and information from which to defend themselves.) In short, KPMG left many of these partners and
former partners high and dry without the resources to defend themselves, particularly when the
prosecutors subsequently indicted those partners and former partners in a combined indictment that
was so sweeping and with so many documents and witnesses that any semblance of presenting a fair
defense was impossible without attorney fee support from KPMG.
In the proceedings pursuant to that indictment, a very sharp federal judge declared the
prosecutors action shameful and unconstitutional; based on the constitutional violation and
finding no other remedy, the court dismissed the indictments that were infected by the prosecutors
actions. See United States v. Stein, 452 F.Supp.2d 230 (S.D.N.Y. 2006) (Stein I); and United
States v. Stein 495 F. Supp. 390 (S.D. N.Y. 2007) (Stein II), affd 541 F.3d 130 (2d Cir. 2008).
These decisions are must readings for white collar crime lawyers (of which tax crime lawyers are
just a subset). I would not attempt to do justice to his well reasoned opinion in the amount of space
I could devote here. But, the following is Judge Kaplans concluding summary of his holding in
Stein I (p. 382):
1.
The Court declares that so much of the Thompson Memorandum and
the activities of the USAO as threatened to take into account, in deciding whether to
indict KPMG, whether KPMG would advance attorneys' fees to present or former
employees in the event they were indicted for activities undertaken in the course of
their employment interfered with the rights of such employees to a fair trial and to
the effective assistance of counsel and therefore violated the Fifth and Sixth
Amendments to the Constitution.
In Stein II, Judge Kaplan confirmed that conclusion and, finding no other remedy for the
constitutional violations, dismissed of the defendants who he found were affected by the violations.
As noted, the dismissals were affirmed by the Second Circuit on appeal in a decision which also is
must reading in this area.1225
After Stein I and before Stein II, Judge Kaplans decision galvanized much of the corporate
and legal community in the United States to assert more vigorously various complaints about the
Thompson Memorandum, particularly the intrusions via the insistence on attorney-client privilege
waiver as well as the withdrawal of attorneys fees. And, politicians weighed in, particular, Senator
1224
In the process, it is likely that KPMGs waiver of its attorney client privilege also
compromised the attorney-client privileges of its partners.
1225
See also United States v. Rigas, 2011 U.S. Dist. LEXIS 66147 (MD PA 2011)
(commenting favorably on Stein but noting its inapplicability because there was no nexus between
the alleged actions of the prosecutors and the particular crime charge i.e., there might have been
a nexus in an earlier prosecution of the defendants but the argument was not made there).
- 502 -
Arlen Specter who introduced legislation to address the abuses he perceived (forced attorney-client
privilege waiver).
As a result of Stein, the other criticisms of the Thompson Memorandum and in order to head
off, if possible, legislation that may be more than it would like, the DOJ once again revised its
guide. The revised guide, also via a memorandum from AAG, Paul J. McNulty, is dated 12/12/06.
(The McNulty Memorandum.) The key points to the revisions to the guide for present purposes
is that it limits (but does not prohibit altogether) prosecutors from using the indictment threat against
corporations if they do not waive the attorney-client privilege1226 and withhold payment of attorneys
fees to employees or former employees (including partners if the entity is a partnership).
Subsequently, the policy was revised once again via yet another Memorandum, this time by
Mark Filip, the Deputy Attorney General.1227 The Filip Memorandum illustrates the general
factors in whether to indict a business entity:
the nature and seriousness of the offense, including the risk of harm
to the public, and applicable policies and priorities, if any, governing the prosecution
of corporations for particular categories of crime (see USAM 9-28.400);
the pervasiveness of wrongdoing within the corporation, including the

complicity in, or the condoning of, the wrongdoing by corporate management (see
USAM 9-28.500);
the corporation's history of similar misconduct, including prior

criminal, civil, and regulatory enforcement actions against it (see USAM 9-28.600);
the corporation's timely and voluntary disclosure of wrongdoing and

its willingness to cooperate in the investigation of its agents (see USAM 9-28.700);
the existence and effectiveness of the corporation's pre-existing

compliance program (see USAM 9-28.800);
the corporation's remedial actions, including any efforts to implement

an effective corporate compliance program or to improve an existing one, to replace
responsible management, to discipline or terminate wrongdoers, to pay restitution,
and to cooperate with the relevant government agencies (see USAM 9-28.900);
collateral consequences, including whether there is disproportionate

harm to shareholders, pension holders, employees, and others not proven personally
culpable, as well as impact on the public arising from the prosecution (see USAM
9-28.1000);
the adequacy of the prosecution of individuals responsible for the

corporation's malfeasance; and
the adequacy of remedies such as civil or regulatory enforcement

actions (see USAM 9-28.1100).1228
1226
Perhaps even more subtly, it may backdoor approval of implicit bullying by allowing
prosecutors to give credit where the organization waives the privilege. See WSJ Opinion Review
and Outlook Article titled The McNulty Memo (12/13/06).
1227
The Memorandum appears in USAM Title 9, Ch. 9-28.000.
1228
USAM 28.300.
- 503 -
The Memorandum provides more detailed discussion of how these factors are to be considered,
particularly in the controversial area of demanding waiver of attorney-client privilege (more
oversight in such demands) and considering entity payment of attorneys fees or demanding that it
stop doing so(not to be considered or demanded). The devil, of course, is in the details, but the
revisions are a good if not totally sufficient start to a process that should go further in determining
how much raw power prosecutors should be able to exercise in our society.
D.
Dual Prosecution and Successive Prosecution.
DOJ has a dual prosecution policy generally precluding the initiation or continuation of a
federal prosecution following a state prosecution based on substantially the same act or acts unless
there is a compelling federal interest supporting the dual prosecution.1229 Similarly, DOJ has a
successive prosecution policy substantially identical in wording except that it applies when there has
been a prior federal prosecution rather than a state prosecution.1230 Both policies are sometimes
referred to the as Petite Policy, after the case that inspired them.
These policies are based upon prosecutorial discretion rather than a legal requirement such
as double jeopardy. Approval of the AAG is required to pursue prosecution in such cases and failure
to obtain approval may result in dismissal of the case. A federal prosecution will not be authorized
unless the state/prior federal proceeding left substantial federal tax interests demonstrably
unvindicated.
E.
Health Policies.
DOJ Tax has no administrative health policy as to whether a taxpayer or other targets
ill-health should preclude a trial. The CTM provides:
The Departments position is that whether a taxpayer should or should not be tried
because of health reasons is a matter which can best be decided by the trial court,
rather than on an administrative basis. Only when it is clear beyond all doubt that a
proposed defendant will never be able to stand trial because of a terminal physical
condition is a case disposed of for reasons of health at the administrative level.1231
1229
1230
1231
CTM 4.02 (2008 ed.), citing the general DOJ policy at USAM 9-2.031.
Id.
CTM 4.04[1] (2008 ed.).
- 504 -
CH. 8 - INFORMATION GATHERING TECHNIQUES

I.
Introduction.
The Government has many tools for investigating a criminal tax case. I discuss here the
major tools.
II.
Section 6103 - What the IRS Already Knows and Its Limits.
When the taxpayer gets in the tax enforcement cross-hairs, the IRS already has a great deal
of information potentially relevant to the taxpayers guilt or innocence. The IRS thus has tax returns
and the results of audits and a host of other bits and pieces of information (e.g., Forms 1099, W-2,
etc.). Virtually all information that the IRS has about the taxpayer is return information1232 generally
prohibited from disclosure under 6103.1233 However, for tax crimes investigations and
prosecutions, the information regarding the taxpayer investigated or prosecuted may be disclosed
to the investigating or prosecuting agencies and in court or administrative proceedings.1234
III.
Cooperating Witness Techniques.
The Government can develop a criminal case by gathering information and documents from
witnesses who supply the information without any legal compulsion to do so. Sometimes the
witnesses are classified as informants and even confidential informants which may create barriers
to the taxpayer discovering who they are.
1232
1233
6103(b)(2).
6103(a). The exceptions to this general rule are numerous based on other national
priorities.
1234
6103(h)(1) (re disclosure to Treasury personnel in performing their official duties),

6103(h)(2) (disclosure to DOJ upon referral); 6103(h)(4) (disclosure in judicial or administrative
proceedings); and 6103(i)(1)(A) (disclosure upon ex parte order for use in certain nontax criminal
investigations). As an example of the latter, assume that the AUSA is investigating bank fraud
based upon a false loan application overstating income and net worth in order to obtain a loan. A
tax return reporting far less income (and, by extrapolation from reported income, less assets) would
be extremely useful in nailing the individual either he or she has committed bank fraud, tax fraud
or both. Another example is the investigation of bankruptcy fraud where a taxpayer may have
understated his or her assets that are otherwise hidden; the taxpayer may have reported the income
on the tax returns over the years and thus the tax returns could lead to the discovery of the
underlying assets. Note that 6103(i) does not authorize disclosure to state employees participating
in a joint federal/state investigations (often called task forces) except through the procedures for
disclosures for state tax administration purposes under 6103. See Joan Bainbridge Safford, Follow
That Lead! Obtaining and Using Tax Information in a Non-Tax Case, 46 USA Bulletin (No. 3) 28,
32 (April 1998). For this reason, in joint task force cases, AUSAs are encouraged to workaround
this limitation by finding some other basis for obtaining the information (e.g., a cooperating witness
entitled to obtain the information under 6103(c)). Id.
- 505 -
The best defense against these informal techniques is to get to the potential witnesses first
to determine what the various witnesses will say or what documents they may provide. Ideally, you
can get the potential witnesses committed in writing to a version that is helpful or, if not
affirmatively helpful, at worst neutral or that can be neutralized in terms of its damage to the client.
Section 7602(c) requires the IRS to give advance notice to taxpayers that contacts with
persons other than the taxpayer may be made and thereafter requires the IRS to give periodic notice
to the taxpayer of the persons who have been contacted. The statute, however, suspends these
requirements for contacts in criminal investigations and for contacts the Secretary determines for
good cause shown that such notice would jeopardize collection of any tax or such notice may
involve reprisal against any person.1235 Once the investigation is criminal, which is the focus of this
course, the IRS need not give the notice.
IV.
Compulsory Evidence Gathering Techniques.

A.
The IRS Administrative Summons.

1.
Introduction.
Section 7602 authorizes the IRS to issue a summons in an audit.1236 The summons may be
used for determining the amount of tax due or information relevant to collection of tax due.1237
Further, the summons may be used to inquire into any offense related to the internal revenue
laws.1238
The summons is an administrative summons,1239 requiring only the action of the IRS; it does
not require any action or approval by a court prior to its use, except in the case of a John Doe
summons discussed below. The summons is comparable in its compulsory power to a subpoena
(either a trial or a grand jury subpoena), but has certain procedures that are not available for trial
subpoenas and certainly not available for grand jury subpoena. As a practical matter, it is relatively
easy for the IRS to use the summons if the taxpayer or third party does not respond or does not
respond timely to less formal requests for information or documents.
1235
1236
7602(c)(3).
The IRS summons is Form 2039. The summons may also be used in collection
matters.
1237
7602(a).
7602(c).
1239
The IRS is not unique in the use of the administrative summons. Other agencies,
such as the SEC, have the authority to use the administrative summons (sometimes, as in the case
of the SEC, referred to as an administrative subpoena) in their investigations. The principles that
I discuss regarding the IRS administrative summons would generally apply also to other agency
administrative summonses.
1238
- 506 -
The summons may demand testimony and / or the production of existing documents. It
cannot compel the taxpayer to create or sign any document, with the exceptions of hand writingexemplars or a consent form (both of which I discuss later).1240
If the witness does not comply with the summons, the IRS may petition a district court to
enforce the summons.1241 I discuss summons enforcement proceedings later.
The IRS is not required to use the summons in order to gather evidence. It may instead use
informal requests to gather evidence.1242 The summons is usually employed when informal requests
are deemed insufficient.
2.
The General Summons.

a.
Scope and Purpose.
The issuance of a summons must be relevant to a legitimate IRS function. Those functions
may be described for present purposes as determination of a tax liability, collection of a tax liability
or investigation of an offense related thereto.
In United States v. Powell,1243 the Supreme Court established the minimum requirements for
an administrative summons. They are:
(1) the inquiry must have a legitimate IRS administrative purpose, rather than just
for settlement or harassment; (2) the testimony or documents sought must be relevant
to that purpose; (3) the information sought must not be within the IRSs possession,
interpreted to mean must not be reasonably available within the IRSs system of
keeping records; and (4) the Codes administrative steps must have been met.1244
Some variation of this list is a frequent litany in summons enforcement cases.
Lets illustrate these requirements by putting them in context in Powell. The IRS issued a
summons to the taxpayer for testimony and records relating to his returns for a year that was beyond
the normal three year civil statute of limitations. The taxpayer did not comply. The Government
brought a summons enforcement proceeding. The issue as it came to the Supreme Court was
whether, in order to use the summons power to conduct an audit of returns for years outside the
normal civil statute of limitations, the IRS must first make a showing of probable cause that an
exception to the civil statute of limitations applied. The Supreme Court rejected a probable cause
1240
United States v. Levy, 533 F.2d 969, 974 (5th Cir. 1976); and United States v. Davey,
543 F.2d 996, 1000 (2d Cir. 1976).
1241
7604 and 7402(b).
1242
United States v. McLaughlin, 126 F.3d 130 (3d Cir. 1997), cert. denied, 524 U.S. 951
(1998).
1243
379 U.S. 48 (1964).
1244
These are paraphrased from the Courts comments on pp. 57-58.
- 507 -
predicate showing for use of the administrative summons. The Court was, however, unwilling to
have no limits on the IRSs summons power, and hence found in the statute and its purposes the
foregoing requirements for a valid administrative summons. The limits are, however, rather
minimal.
What this means is that, so long as the IRS can articulate almost any legitimate purpose for
using the summons to obtain potentially relevant information or documents,1245 a court will not
interfere by quashing the summons or refusing to enforce it. Of course, the IRS must articulate some
relevancy and materiality to a legitimate IRS function. Relevancy and materiality are relative terms.
In a civil litigation context, what may be relevant and material after the issues are honed for trial
may not be the same as during the discovery phase of litigation. So too, the scope of relevancy and
materiality is and must be broad in the investigative phase. Accordingly, extremely liberal concepts
of relevance, with little boundaries for materiality, play out in the discovery phase.
Powells requirements for a valid summons drives the whole process. One court has thus
described the process in the summons enforcement proceeding as follows:
In determining whether to enforce IRS summonses under these substantive
[Powell] standards, we do not write on a pristine page. This court has constructed a
three-tiered framework for expediting such determinations. To mount the first tier,
the IRS must make a prima facie showing that it is acting in good faith and for a
lawful purpose. This burden is not taxing, so to speak. Courts repeatedly have
confirmed that an affidavit of the investigating agent attesting to satisfaction of the
four Powell elements is itself adequate to make the requisite prima facie showing.
Once this minimal showing surfaces, the burden shifts to the taxpayer to rebut
the good-faith presumption that arises in consequence of the governments prima
facie case. The taxpayer is not at this stage required to disprove the governments
profession of good faith. She must, however, shoulder a significant burden of
production: in order to advance past the first tier, the taxpayer must articulate
specific allegations of bad faith and, if necessary, produce reasonably particularized
evidence in support of those allegations. This showing does not demand that the
taxpayer conclusively give the lie to the prima facie case, but only that she create a
substantial question in the courts mind regarding the validity of the governments
purpose. To reach this goal, it is not absolutely essential that the taxpayer adduce
additional or independent evidence; she may hoist her burden either by citing new
facts or by bringing to light mortal weaknesses in the governments proffer.
If the taxpayer satisfies this burden of production, the third tier beckons. At
this stage, the district court weighs the facts, draws inferences, and decides the issue.
To do so, the court frequently will proceed to an evidentiary hearing, taking
1245
In United States v. Arthur Young & Co., 465 U.S. 805, 814 (1984), the court gave
a liberal discovery-type interpretation to the relevance requirement, noting that the summons may
seek items potentially relevant, regardless of relevance in any technical evidentiary sense.
- 508 -
testimony and exhibits from both sides. But there is no hard-and-fast rule
compelling an evidentiary hearing. A district court may, in appropriate
circumstances, forgo such a hearing and decide the issues on the existing record.
A question lingers at the third tier as to the continuing viability of the original
presumption in favor of the IRS. The case law seems to suggest that the presumption
endures and serves at this stage to saddle the taxpayer with the burden of persuading
the judge, qua fact finder, that at least one of the Powell elements is missing. We are
somewhat skeptical of this approach, especially given the Supreme Courts recent
lesson on presumptions and burdens of proof in an analogous setting. The Courts
treatment of presumptions in Hicks is consistent with the basic principle, codified in
the Federal Rules of Evidence:
In all civil actions and proceedings not otherwise provided for by Act
of Congress or by these rules, a presumption imposes on the party against
whom it is directed the burden of going forward with evidence to rebut or
meet the presumption, but does not shift to such party the burden of proof in
the sense of the risk of nonpersuasion, which remains throughout the trial
upon the party on whom it was originally cast.
Fed. R. Evid. 301.1246
Keep in mind that the foregoing is just one circuit courts thoughtful analysis of the process.
All courts would not necessarily agree with this process, but I offer it to you because it is offers clear
thinking on the process.1247
The summonsee must have a jurisdictional nexus with the United States in order to make the
summons compulsory. As will be discussed in more detail, the ultimate compulsion with respect
to a summons comes from the summons enforcement proceeding in the district court. The summons
itself is not self-enforcing. Foreign parties with no jurisdictionally sufficient ties to the United States
are beyond the IRSs summons power simply because the IRS has no way to enforce the summons.
1246
United States v. Gertner, 65 F.3d 963, 966-968 (1st Cir. 1995). I have omitted the
case citations, except the Powell case name, and some minor amount of the text for easy readability.
1247
For procedures in other courts, see United States v. Tiffany Fine Arts, Inc., 718 F.2d
7, 14 (2d Cir. 1983), aff'd, 469 U.S. 310 (1985); United States v. Kis, 658 F.2d 526, 539-540 (7th
Cir. 1981) (requiring the taxpayer to develop facts sufficient to allow court to draw inference of
wrongful conduct by government before adversarial hearing can be granted); United States v. Nat'l
Bank of South Dakota, 622 F.2d 365, 367 (8th Cir. 1980) (per curiam); and Nero Trading, LLC v.
United States of America, 570 F.3d 1244, 1248 (11th Cir. 2009) (IRS minimal burden may initially
be met with sworn affidavit of agent, thereby shifting the burden to the party opposing the summons
to disprove the Governments allegations; upon that partys allegation of improper purpose, a limited
adversarial proceeding is permitted without time consuming advance discovery (depositions,
interrogatories, etc.)).
- 509 -
But, foreign parties with jurisdictionally sufficient ties e.g., a U.S. branch of a foreign bank can
be subject to the summons and summons enforcement processes.1248
b.
Song and Dance.
The basic song and dance procedure for handling an administrative summons is as follows:
The summons is served by one of the following three methods:
delivery in hand to the witness;
delivery by leaving a copy at the last and usual place of abode.
if a third party recordkeeper summons (which I discuss below), delivery by certified or
registered mail.1249
The IRS summons requires the witness to appear at the time and place designated in the
summons to give testimony and/or to produce documents. The witness appears as required.1250 The
questioning is conducted by IRS representative normally the agent conducting the investigation,
but, under recently revised procedures, it may be an IRS attorney.1251 The witness either responds
(i.e., produces documents and/or answers questions), or asserts grounds or reasons for not
responding to any questions or requests for documents. The most frequent at least facially legitimate
grounds for not responding are privileges such as the Fifth Amendment privilege and the attorney
client privilege but may also include other privileges and inability to respond (lack of possession of
the documents summonsed). The privileges are more properly asserted in response to specific
questions or requests for documents which should disclose sufficient unprivileged information to
justify the assertion of the privilege. Thus, for example, the assertion of privilege for documents
1248
See In re Grand Jury Proceedings (United States v. Bank of Nova Scotia), 691 F.2d
1384 (11th Cir. 1982), cert. denied, 462 U.S. 1119 (1983); and the companion case In re Grand Jury
Proceedings (United States v. Bank of Nova Scotia), 740 F.2d 817, 832-33 (11th Cir. 1984), cert.
denied, 469 U.S. 1106 (1985) (upholding a contempt order and levying fines totaling $1,825,000).
1249
7603(a) & (b). For an example of service abroad where the IRS is unable to rely
upon a treaty exchange of information provision and must instead rely upon the more general Hague
Convention on the Service Abroad of Judicial and Extrajudicial Documents in Civil or Commercial
Matters, see ILM 200143032, reproduced at 2001 WTD 210-29 (10/30/01).
1250
As I discuss shortly below, failure of a summonsed witness to appear pursuant to the
summons appears to be a misdemeanor offense ( 7210), but the Second Circuit has recently held
that the failure alone may not be sanctioned.
1251
The Q&A at the summons proceeding has historically been performed by the line IRS
person (revenue agent or collection officer for civil investigations or Special Agent for criminal
investigations). That person may have been prepped by counsel, but counsel did not perform the
Q&A. The IRS recently issued temporary and proposed regulations permitting any designated IRS
employee, including a Chief Counsel attorney, to be involved in the process, including the Q&A.
See Regs. 301.7602-1T(b); Prop. Reg. 301.7602-1(b), both of which were issued on 9/9/02.
- 510 -
requested by subpoena may require some type of privilege log, unless the context would require
disclosure of the privileged information (e.g., producing a privilege log where the defendant asserts
the act of production privilege based on the testimonial aspect of even identifying the documents).
The witness may also assert defects in the IRSs use of the summons e.g., under the Powell
standard discussed above or, as I discuss later, because the IRS used the wrong type of summons.
Virtually any defense asserted in good faith at this stage will work.
If the IRS is not satisfied with the witnesss response, the IRS may seek judicial enforcement
in the U.S. district court.1252 In the summons enforcement proceeding, a limited adversary hearing
will be conducted before the court enters an order to enforce the summons.1253 At the hearing, the
summonsee will be given an opportunity to state his or her basis for refusal to comply, and sanctions
may not be imposed for a good faith refusal to comply.1254 The hearing is usually a summary
proceeding without discovery. The court may then dismiss the petition (rarely) or order the
summons enforced (more common).
The district courts order to enforce the summons is appealable, but district courts often do
not stay enforcement so that an effective appeal can be taken. The taxpayer will then be given an
opportunity to comply pursuant to the order. If the taxpayer fails to comply with the district courts
order, the Government may institute a show cause proceeding before the same district court to
hold the taxpayer in contempt for violation of the order enforcing the summons. In the contempt
phase of the case, the taxpayer generally may not relitigate defenses he or she could have argued,
but did not, in the summons enforcement phase prior to the issuance of the courts order.1255
c.
Remedies for Failure to Comply.
Section 7210 imposes a misdemeanor criminal penalty upon a summonsee who neglects
to appear pursuant to summons or produce documents summonsed.. It has long been clear that the
summonsed witness who appears as summonsed but asserts good faith defenses to answering
questions or producing documents will not be subject to this sanction.1256 If the IRS desires to test
the witness defenses, the Government may pursue judicial enforcement of the summons via a
summons enforcement proceeding in which the court will pass on the witness defenses to
compliance, will order compliance if it rejects those defenses, and then will impose a contempt
1252
See 7402(b) and 7604(a).

Donaldson v. United States, 400 U.S. 517, 525 (1971).
1254
Reisman v. Caplin, 375 U.S. 440, 445-446 (1961).
1255
Reisman v. Caplin, 375 U.S. 440, 447 (1964) (noncompliance is not subject to
prosecution thereunder when the summons is attacked in good faith. ); see also United States v.
Rylander, 460 U.S. 752 (1983).
1256
The 2008 CTM has no recommended instructions for 7210. In a prior CTM (2001
ed.), Indictment and Information Form for 7210, there was only single form of indictment that
alleged as the element of the crime that the defendant was summonsed and failed to appear or
produced the documents summonsed.
1253
- 511 -
penalty if the witness fails to comply with the court order.1257 This still left open the possibility that
a witness who flouts the summons without appearing and making a colorable good faith defense to
noncompliance might be subject to prosecution under 7210 even if the Government does not seek
enforcement of the summons or if the Government is unsuccessful in the enforcement proceeding.
The Governments position is that it could prosecute that witness.
However, in a remarkable decision, the Second Circuit rejected that position. In Schulz v.
I.R.S., 395 F.3d 463 (2d Cir. 2005), the Court held that a witness could not bring a motion to quash
a summons. The reasoning was that there was no harm to the witness from simply not complying
with the summons and hence there was no case or controversy presented by a motion to quash. The
Court reasoned that, if the Government were unhappy with the witness noncompliance, the
Government could bring a summons enforcement proceeding which would fully comply with the
witness right to due process. Given this procedure, there is no room for imposition of a criminal
sanction under 7210 for mere noncompliance with the summons. The Government was unhappy
with that decision and filed a motion which the Second Circuit treated as a motion for rehearing to
correct the earlier decision. The Second Circuit stuck to its position, holding there was nothing
to correct and clarifying that it meant exactly what it said. In a now precedential decision, the Court
succinctly said (Schulz v. IRS, 413 F.3d 297, 298-299 (2d Cir. 2005) (footnotes omitted):
Having considered the arguments of the parties, we grant the petition
to rehear for only the limited purpose and to the extent necessary to
clarify our prior opinion and hold that: 1) absent an effort to seek
enforcement through a federal court, IRS summonses to appear, to
testify, or to produce books, papers, records, or other data, 26 U.S.C.
7604, issued under the internal revenue laws, id., apply no force
to the target, and no punitive consequences can befall a summoned
party who refuses, ignores, or otherwise does not comply with an IRS
summons until that summons is backed by a federal court order; 2)
if the IRS seeks enforcement of a summons through the federal
courts, those subject to the proposed order must be given a reasonable
opportunity to contest the government's request; 3) if a federal court
grants a government request for an order of enforcement then any
individual subject to that order must be given a reasonable
opportunity to comply and cannot be held in contempt or subjected
to indictment under 26 U.S.C. 7210 for refusing to comply with the
original, unenforced IRS summons, no matter the taxpayer's reasons
or lack of reasons for so refusing.
Even under the Schulz analysis, the witness does assume some risk under 7210 if the
Government is willing to seek judicial enforcement of the summons and the witness refuses to
comply with a resulting court order. But, under Schulz, the witness who gambles that the
1257
See e.g., United States v. Darwin Construction Company, Inc., 873 F.2d 750 (4th Cir.
1989), where the court imposed a civil contempt penalty of $5,000 per day and noted that a district
court has broad powers to fashion an appropriate coercive remedy.
- 512 -
Government may not be willing to expend the resources to seek judicial enforcement of the
summons can flout the summons at will and still dodge the bullet if the Government does seek
judicial enforcement by then complying with any resulting court order.
I think Schulz was incorrectly decided. It effectively reads 7210 out of the law and places
inappropriate burdens on the system.1258 But, that is the law for the time being in the Second
Circuit. Until the law is further clarified elsewhere, I think that proceeding with the hope of the
Schulz result in other circuits is a high risk adventure.1259
3.
Third Party Summons.
The IRS is generally required to notify taxpayers being investigated of the issuance of third
party summonses.1260 This notice requirement applies to all third party summonses issued in the
investigation of a taxpayers tax liability. The problem in the current context (tax fraud) is that,
except as to third party recordkeepers,1261 notification is not required when the summons is issued
by a criminal investigator of the Internal Revenue Service in connection with the investigation of
an offense connected with the administration or enforcement of the internal revenue laws.1262 And,
even notice to third party recordkeepers is not required if a court determines that there is reasonable
cause to believe that the giving of notice would lead to certain acts (conceal or destroy records,
intimidate witnesses, and the like).1263
1258
From a technical perspective, 7210 on its face does not condition the misdemeanor
upon a predicate petition to enforce and witness noncompliance of a court order. And, focusing on
the summons power itself, Congress clearly intended the summons to be compulsory even absent
a court order and the criminal sanction is logically required so that a witness is not confused into
thinking there is no compulsion without the court order. And, of course, it will lead to many
unnecessary steps in the process. Consider, for example, an IRS summons to a witness who will
assert a Fifth Amendment privilege. The law is clear that the Fifth Amendment privilege is properly
asserted in response to specific questions, for that is the only way a court can test whether it is
properly asserted. United States v. Malnik, 489 F.2d 682 (5th Cir. 1974), cert. denied 419 U.S. 826
(1974). If the witness simply flouts the summons and does not even hear the questions in order to
properly assert the privilege, there will be no record upon which to test whether he or she properly
asserted the privilege. Thus, upon filing the summons enforcement proceeding, all a court can do
is order the witness to appear to listen to the questions to properly assert the privilege which, of
course, the witness should have done prior to bothering the court. The process thus will impose
unnecessary burdens on the system without protecting any substantial right in situations where the
taxpayer makes no colorable compliance with the summons in the first instance.
1259
See e.g., Burgess J. W. Raby and William L. Raby, No Penalty for Failure to Comply
with IRS Summons, But ...., 106 Tax Notes 1061, 1062 (2005) (noting prudential as well as legal
reasons for not simply flouting an IRS summons).
1260
7609(a)(1).
1261
Defined in 7603(b)(2).
1262
7609(c)((2)(E).
1263
7609(g). I think the practical effect of this exception to the notice requirement is
quite limited. If the circumstances exist that would permit a petition to the court, it is likely that a
- 513 -
If the summons is a summons requiring notice to the taxpayer (either a third party summons
before the investigation turns criminal or a third party record-keeper summons at any time), the
taxpayer has the right to bring a proceeding to quash the summons or to intervene in a proceeding
brought by the IRS or the summonsee regarding enforcement of the summons.1264 Beyond the fact
that, on the merits, such challenges rarely succeed under Powell and its progeny, the problem with
this procedure, which can achieve significant delays, is that it suspends the running of the civil and
criminal statute of limitations during the pendency of the proceeding or any appeal.1265 If the
proceeding is between the IRS and the third party summonsee and the taxpayer does not intervene,
the taxpayers statute of limitations will still be suspended because of circumstances beyond his
control.
Even more ominously, the statute seems to suspend the civil and criminal statute of
limitations even without a judicial proceeding being commenced In the absence of the resolution
of the summoned partys response to the summons.1266 The statute is suspended for the period from
6 months after the service of such summons through the final resolution of such response. It
therefore appears that if there is a dispute as to the adequacy of a response, even if not made the
subject of a judicial proceeding, the statute will be suspended and stay suspended as long as the IRS
is not satisfied. Does this give the IRS the right to force a suspension of the statute simply by
issuing enough summonses until it finds a summonsee with whose response it is not satisfied? Is
this fair? Does it violate due process?
4.
John Doe Summons.
The John Doe Summons is a summons to a third party that has records that might identify
taxpayers with potential U.S. tax liabilities but whose identities are unknown to the IRS.1267 For
most of the time that the procedure has been available, the most prominent use of the John Doe
Summons was to discover the names of tax shelter investors from the tax shelter promoters to whom
the John Doe Summons is issued. Most recently, the most prominent use of the John Doe Summons
was to discover the names of U.S. taxpayers with accounts in offshore Tax Haven jurisdictions either
from credit card processors or, most recently, the foreign institution itself.
The John Doe Summons procedures require the IRS to first convince a court that the
investigation relates to a particular person or ascertainable group or class of persons, that there is
reasonable cause to believe that the person or persons so identified may not have complied with the
tax laws, and that the information sought is not readily available from other sources. The check in
the normal third party summons procedures is that the taxpayer, who must be notified (subject to the
criminal investigation is involved so that no notice to the taxpayer is required in any event.
1264
7609(b). The statute limits the right to quash to the taxpayer involved in the
investigation. Hence, a taxpayer not involved in the investigation and not the summonsee but whose
information or documents are subject to the summons may not move to quash the summons. Stewart
v. United States, 511 F.3d 1251 (9th Cir. 2008).
1265
7609(e)(1).
1266
7609(e)(2).
1267
7609(f).
- 514 -
rules noted above), will have the incentive to contest any overreaching by the IRS. As to
unidentified third parties, however, the IRS cannot provide notice to the taxpayers because it does
not know who they are. The requirement for advance court approval for such summonses is a
surrogate -- through a check by an objective third party -- for notice to the taxpayer.1268
If the summonsed party refuses to comply with the summons, the Government can bring a
summons enforcement proceeding. In that summons enforcement proceeding, the summonsed party
can assert the Powell defenses (as noted above, rarely sustained). Also, the unidentified third parties
may seek leave to intervene under a legal pseudonym (often John Doe) to assert those defenses.
Neither may, however, contest the propriety of the ex parte order allowing the John Doe summons
ab initio.1269
The IRS sometimes finds that the John Doe Summons procedures slow it down. The IRS
must first convince DOJ Tax that it is worth pursuing through the procedure. DOJ Tax must gear
up and present the matter to a frequently skeptical and almost always overworked District Court who
must play devils advocate to the Governments ex parte application for the summons. Obviously,
the IRS would much prefer just to use its administrative summons which has no such cumbersome
steps.
In United States v. Tiffany Fine Arts, Inc., 469 U.S. 310 (1985), the Supreme Court blessed
the IRSs use of the regular administrative summons rather than the John Doe Summons where the
target of the summons was a shelter promoter which had transactions relevant to its tax liability
which, if discovered, might also identify otherwise unknown shelter investors and be relevant to
their tax liabilities. By allegedly investigating the promoters tax liability to support inquiries into
whether it reported its income from those unknown shelter investors, the IRS could summons the
information under the general administrative summons by meeting the minimal requirements of
Powell. The Supreme Court blessed that gambit and refused to require the John Doe Summons
procedure. After Tiffany Fine Arts, the IRS saw an escape from the annoyances of the John Doe
Summons procedures -- simply find a reason to audit the third party record-keeper and find some
pretext that obtaining the names of the third parties is relevant under the Powell standards to the
audit of that record-keeper.
The IRS tried that gambit in United States v. Gertner.1270 In Gertner, a client of a law firm
paid the firm a large amount of cash which required that the law firm file the CTR1271 reporting the
receipt of cash. The client did not want his name divulged to the Government for fear that the
Government might use the information as to possession of that amount of cash against the client.
The law firm filed the CTR but asserted ethical obligations, attorney-client privilege, and specified
constitutional protections against naming the payor (i.e., the client). The John Doe Summons would
1268
Tiffany Fine Arts, Inc. v. United States, 469 U.S. 310, 321 (1985).
Does v. United States, 866 F.2d 1015 (8th Cir. 1989); United States v. Samuels,
Kramer and Co., 712 F.2d 1342 (9th Cir. 1983.
1270
65 F.3d 963 (1st Cir. 1995). Gertner is a good read. I highly recommend that you
read this case at some time.
1271
6050I is the Code reporting requirement. The Form for the CTR is Form 8300.
1269
- 515 -
fit the situation like a glove, assuming of course that a court would have authorized its issuance. Not
to be slowed down, the IRS issued a regular summons for records (billing records) and testimony
that would identify the client. The law firm declined to comply, asserting the same grounds. The
Government moved to enforce the summons.
The district court refused to enforce the summons, finding that the IRSs use of the regular
IRS summons was not in good faith. The Supreme Court in Tiffany Fine Arts had blessed use of
a regular summons which might have the collateral effect of identifying unknown taxpayers only
if related to an investigation of the person whose records were seized. The Government thus had
to represent in the proceeding that it had a legitimate interest in auditing the law firm. The Court
found that that representation in Gertner was pretextual a hoax designed only to end-run the John
Doe Summons procedure.
The Court of Appeals reviewed the agents affidavit which it found to be conclusory and
with no detail behind the conclusions. Under the burden shifting analysis quoted above, the Court
found that the bare-bones affidavit just barely cleared Powells first-tier requirement with little
room to spare, a defect which haunted the Government when the taxpayer scaled the second-tier
burden. The affidavit was just boiler-plate from an affidavit successfully used in a prior proceeding.
Focusing on the second-tier, the Court of Appeals noted that the law firm documented the allegation
that the IRSs allegations of real interest in the tax liability of the law firm and its partners was
pretextual. Having successfully met the requirement of the second-tier, the Government then failed
to meet its burden in the third-tier by proving the Powell requirement that the summons be issued
for the putative purpose of determining the law firms liability rather than as a pretext to obtain the
clients name as an end-run around the John Doe Summons procedure.
The Government asserted that Tiffany Fine Arts required the enforcement of the summons.
The Court of Appeals disagreed, saying that the critical difference was a trial court finding in
Tiffany Fine Arts that the Powell requirement had been met as to the summonsee. In Gertner, by
contrast, the trial court found that the regular summons was pretextual, and that finding was not
reversible on appeal.
As Gertner shows, the IRS is quite enamored with the Tiffany Fine Arts end-run around the
hassle of the John Doe Summons procedure. The standard technique is to clone the agents affidavit
in Tiffany Fine Arts or some other successful case involving the gambit, usually with some diligence
to change the names and dates but without much customizing to insure that the form fits the
circumstances. Gertner establishes that the IRS is at risk if it fails to insure that it really does have
a legitimate investigative interest in the summonsee.
Recently, the most prominent instances of the IRS use of the John Doe Summons have been
to identify U.S. taxpayers using offshore financial accounts to hide taxable income. For such
activity, the expectation of secrecy is the name of the game, so this activity is concentrated in
countries that are referred to as tax havens. The IRS is often unable to determine whether the U.S.
taxpayer has a Tax Haven financial account or the amount in the account if they knew or suspected
he or she had one. The John Doe Summons works well in such a case, at least when the party
having information that can identify the U.S. taxpayers is within the IRS summons power (meaning
- 516 -
that a U.S. court will impose meaningful sufficient pain via the contempt power to compel
compliance).
Most Tax Haven financial institutions participating in this offshore evasion service for U.S.
taxpayers try to avoid any U.S. presence that would subject them to the IRS summons and U.S. court
contempt powers. They are not always successful. So the IRS has used the John Doe Summons in
two prominent waves.
First, the IRS issued John Doe Summonses to U.S. credit and debit card processors who
processed the credit and debit card transactions that U.S. taxpayers used to tap their offshore funds
in a way that they and the Tax Haven banks thought would be invisible to the IRS. Once those debit
and credit card transaction documents were obtained, the IRS might be able to match names or, in
some cases, tie back to charges for U.S. taxpayer accounts at the U.S. vendor. The issuance and
approval of the John Doe summonses to the credit and debit card transaction processors were
covered with great fanfare in the press. Taking advantage of the press, the IRS created a special
voluntary disclosure initiative whereby U.S. taxpayers having offshore accounts could solve their
potential criminal exposure. (I will talk more about the special voluntary disclosure initiative later.)
Second, in 2008, the IRS fired the second volley in the offshore financial institution war via
the John Doe Summons issued to what appears to have been the worst offender the giant UBS, a
Swiss financial institution. UBS, which had a substantial U.S. presence for other reasons, routinely
assisted U.S. taxpayers hide their income from the IRS. Rather than sitting in Switzerland beyond
the IRS summons power and U.S. court contempt power, UBSs bankers made substantial forays
into the U.S. to practice the skulduggery. The IRS learned of these activities and issued a John Doe
Summons to UBS for it to disclose the names of the estimated 50,000+ U.S. taxpayer maintaining
accounts with UBS. UBS claimed that Swiss law prevented it from complying with the summons,
the Swiss Government got into the fray in order to assert its sovereign right to assist U.S. taxpayer
cheat on their taxes by maintaining their anonymity, and an international crisis was created. Both
sides blinked, but not before the U.S. breached the dam of vaunted Swiss bank secrecy. The upshot
was that UBS agreed to a deferred prosecution agreement requiring it to pay more than $750 million
in fines and, more importantly, the Swiss Government agreed to reinterpret the exchange of
information provision of the U.S. / Switzerland double tax treaty to permit UBS to make the
disclosures of the names and account information for the taxpayers that the IRS had not identified.
So, although the John Doe Summons did not technically produce the information sought, the
reinterpretation of the treaty is producing some of the information sought and that reinterpretation
was the result, in major part, of the John Doe Summons (as well as the criminal deferred prosecution
agreement and other initiatives). The dam was breached, and the expectation is that the hole will
get bigger through exchange of information treaty processes.
5.
Referral to DOJ Tax.
The IRSs use of the administrative summons and new summons enforcement actions must
cease when the criminal investigation of the taxpayer is referred to DOJ Tax for criminal prosecution
- 517 -
or further grand jury investigation.1272 This creates a bright-line test when IRS administrative
efforts using this summons compulsory process must cease. 1273 (Note, however, that this limitation
applies when the taxpayer whose taxes are being considered is referred; it does not apply to a third
party witness where the taxpayer has not been referred but the third party witness has been
referred.1274)
This bright-line test of when the IRS should cease using the administrative summons was
enacted after cases such as United States v. LaSalle Natl Bank,1275 which raised the troublesome
issue of whether the IRS had hung on to a criminal investigation beyond the time that it should have
been referred to DOJ or whether the summons would be used solely for criminal purposes. The
notion is that use of the administrative summons is tolerable so long as the focus of the investigation
serves both a civil and criminal tax purpose. But, the use of the summons was not appropriate after,
institutionally within the IRS, the investigation had solely a criminal focus. This created a great deal
of uncertainty, so Congress declared that a criminal investigative purpose is a legitimate purpose for
a summons1276 but provided a bright-line test1277 that suspends authority for the summons or new
summons enforcement proceedings when the IRS makes a referral to DOJ.
Query: do these provisions foreclose the bad faith inquiry? What if, indeed, the IRS were
abusing the summons power by delaying the referral to DOJ in bad faith? What, if any, are the
standards that apply to determine when the case should be referred and therefore would apply in
determining whether the IRS has improperly delayed referral?1278
1272
7602(d). A summons enforcement proceeding commenced before the referral,

however, may be continued after the referral. Drum v. United States, 602 F.Supp. 834 (M.D.Pa.
1985).
1273
A summons enforcement proceeding commenced before the referral, however, may
be continued after the referral. Drum v. United States, 602 F.Supp. 834 (M.D.Pa. 1985).
1274
Khan v. United States, 548 F.3d 549 (7th Cir. 2008).
1275
437 US 298 (1978).
1276
7602(b).
1277
7602(d). A summons enforcement proceeding commenced before the referral,
however, may be continued after the referral. Drum v. United States, 602 F.Supp. 834 (M.D.Pa.
1985).
1278
United States v. Michaud, 907 F.2d 750, 752 n.2 (7th Cir. 1990) (en banc) (discussing
views on whether a LaSalle-type inquiry survives these amendments, but declining to resolve issue);
United States v. Berg, 20 F.3d 304, 309 n. 6 (7th Cir. 1994) (taxpayer correctly notes that the
Service cannot use its summons authority if its only purpose is to gather evidence for a criminal
investigation, (i.e. if it has no civil purpose whatsoever and [it] has abandoned any institutional
pursuit of civil tax determination, but citing only Michaud which did not resolve the issue) [Internal
quotations omitted for clarity]). The Seventh Circuit has subsequently suggested that the LaSalle
issue may still be alive. See United States v. Utecht, 238 F.3d 882 (7th Cir. 2001); see John A.
Townsend, Taxpayer Rights in Criminal Investigations, 90 Tax Notes 1842 (3/26/01) & 2001 TNT
52-63 (3/16/01).
- 518 -
6.
Summons Pursuant to Tax Treaties.
In an increasingly globalized economy, records relevant to tax administration in one country

may be possessed by someone in another country. Under many U.S. bilateral tax treaties, one treaty
partner is obligated to assist the other in gathering information relevant to the latters tax
administration. For example, the Canadian tax authority (referred to as the competent authority
in treaty parlance) under the U.S./Canada Double Tax Treaty may request the U.S. tax authority (i.e.,
the U.S. competent authority) to obtain information in the U.S. for Canadian tax administration. If
the request is within the scope of the treaty, the U.S. competent authority will authorize the IRS to
issue an administrative summons. The ultimate taxpayer involved may then bring a motion to quash
if the summons is to a third party or, if the summons is to the taxpayer, may invoke any basis for
noncompliance and await the IRSs pursuit of a summons enforcement proceeding.
In United States v. Stuart, 109 S. Ct. 1183 (1989), Canada made such a request to the U.S.,
the U.S. issued summonses to third parties, and the taxpayer brought a motion to quash. The issue
presented was whether the Codes limitation on the use of administrative summonses when a DOJ
referral is in effect1279 applies in the case of a summons issued under the Canadian treaty in relation
to the Canadian tax. That Code limitation had been enacted after the U.S./Canadian treaty in
question had been negotiated and entered into force. Arguably, even if that limitation were not in
the treaty, Congresss subsequent legislation may have created a treaty override. The taxpayer
argued that the status of the Canadian tax investigation was the equivalent of a DOJ referral and thus
the use of an IRS administrative summons was not proper. The Court held that, notwithstanding the
subsequent enactment, the treaty itself controlled and had no such limitation, so that it need not
inquire into the status of the Canadian investigation.
The situation discussed deals with the procedure whereby the IRS uses its processes to obtain
information for treaty partner tax administration. I discuss below the processes available when, for
U.S. tax administration, the IRS requests foreign authorities to use their processes to obtain
information in their jurisdiction.
B.
Search Warrants.
1.
General.
The IRS is authorized to seek search warrants in its investigations.1280 The IRS has
increasingly used the search warrant as an investigative tool.1281 Obtaining a search warrant, of
course, requires the Government to establish that there is probable cause to believe that a crime has
been committed.1282 The object of the search may include (1) property that constitutes evidence
of the commission of a criminal offense; or (2) contraband, the fruits of crime, or things otherwise
1279
7602(d).
7302, 7608(b) and 7613(b).
1281
See generally, Kenneally, Increased Use of Search Warrants by IRS, 20 Champion
41, 43 (Jan/Feb 1996).
1282
FRCrP Rule 41(d)(1).
1280
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criminally possessed; or (3) property designed or intended for use or which is or has been used as
the means of committing a criminal offense.1283
Search warrants in tax cases usually seek items that are in the first category evidence of
the commission of a crime. Most often they are documents related to finances in some way books
and records of a business, bank and investment statements, etc. Consider the following from the
CTM:
The concept of seizing personal or business books and records as the evidence or
instrumentality of a crime is not as direct or simple a problem as is the seizure of a
contraband. These documents usually contain much personal and confidential
information and these very same documents, which, by their own nature, are not
unusual, illegal or dangerous, will be the evidence of or the instrumentality of the
crime to be charged. In addition to the controversial nature of such a seizure of
documents, the requirement that the items to be seized must be named with
specificity is more difficult to meet. In tax cases, the warrant must be specific, not
only regarding the items to be seized and the place searched, but a specific time
frame must also be stated.
Sometimes the execution of a search warrant is the first notice that the party is a target of an
IRS investigation. Obviously, by the time the IRS has the proof necessary to support an application
to the district court for a search warrant, the investigation has gone on for some time. Usually, the
fact of the investigation will have surfaced in some other way. But, if not (for example, where
cooperating sources give very good information or where the party is related to other parties in a
larger investigation in which that party is an outlier in the conduct being investigated and has not
yet surfaced as a target), this will give notice in spades. The search warrant may produce a motherlode of incriminating information for the Government against the previously unsuspecting target.
2.
General Practices.
Search warrants are normally not used against a person who is merely a witness (i.e., not a
target or subject of the investigation).1284 Note the emphasis on normally; the Government will seek
a search warrant if the circumstances suggest that the witness might have some reason to not respond
properly to a summons or a subpoena.1285 Further, search warrants for the premises of physicians,
lawyers, accountants, public officials, clergymen, news media representatives, labor union official
and exempt organization officials require the approval of the United States Attorney or an Assistant
Attorney General.1286
1283
FRCrP 41(b). The IRS typically uses the search warrant to obtain mere evidence
such as books and records as permitted by Warden v. Hayden, 387 U.S. 294 (1967).
1284
See USAM 9-19.00 and 9-19.220.
1285
USAM 9-19.210.
1286
CTM 3.00 (2008 ed.), incorporating DOJ Tax Directive No. 52; see also CTM 2.00
(2001 ed.), incorporating inter alia USAM 6-4.130.
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If IRS Special Agents believe they can establish probable cause to seek a search warrant in
an administrative investigation, they consult with IRS Counsel, who must review and approve all
Title 26 search warrants and take an active role in preparing the proposed warrant and the supporting
affidavit.1287 With Counsel approval, the Special Agent may ask DOJ to seek the search warrant.
DOJ policies regarding the seeking of search warrants in tax cases are found in the CTM.1288
Generally, as to subjects or targets of a tax investigation, the request is made directly to the U.S.
Attorneys office for the district in which the search warrant will be executed and must be approved
by the First Assistant United States Attorney or the AUSA who is chief of criminal functions must
approve the seeking of the search warrant.1289 Otherwise, certain categories -- accountants, lawyers,
physicians, public official/political candidates, members of the clergy, news media representatives,
labor union officials, or officials of 501(c)(3) tax exempt organizations -- require approval of DOJ
Tax.1290
3.
Emails and Search Warrants.
If an investigative agency wants emails stored on a targets computers, the agency will have
to obtain a search warrant to obtain the emails. However, for emails (and other forms of digital
communications) stored on computers other than the taxpayers (such as on the internet service
providers servers), the question is whether the IRS can obtain them via the compulsory process of
the grand jury subpoena or the IRS summons (or other equivalent of such process). Normally, under
what is known as the Third Party Records Doctrine, records in the hands of a third party (i.e., not
the owner who is being investigated) may be obtained by compulsory process (subpoena or
summons) without a search warrant. The Stored Communications Act ("SCA")1291 required the
investigative agency to get to such communications less than 180 days old only by search warrant,
but implied that subpoena or summons could be used to obtain communications over 180 days old.
The Sixth Circuit recently conducted a Fourth Amendment analysis and found that such electronic
communications had the required expectation of privacy and other characteristics of interests
protected by the Fourth Amendment that they should be protected by the Fourth Amendment and
thus should be compelled only by a search warrant rather than a subpoena or a summons.1292 This
presumably might extend to offsite electronic storage with assurances of privacy, although one
might argue that email communications are closer to the interests protected by the Fourth
Amendment.
1287
IRM 9.4.9 Search Warrants, Evidence and Chain of Custody

CTM 1.05[3] & 3.00, Tax Division Directive No. 52 : Authority to Apply for Title
26 or Tax-related Title 18 Search Warrants (2008 ed.).
1289
Id.; see also USAM 6-4.130.
1290
Id.
1291
18 U.S.C. 2701 et seq.
1292
United States v. Warshak, 631 F.3d 266 (6th Cir. 2010), reh'g and reh'g en banc
denied, 2011 U.S. App. LEXIS 5007 (6th Cir. 2010).
1288
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4.
Remedies for Improper Searches and Seizures
The exclusionary rule is the remedy for improper searches and seizures.1293 The warp and
woof of the remedy is substantial and beyond the scope of this text since it is not unique to use of
the search warrant to investigate or prove tax crimes.
C.
The Grand Jury Investigation.

1.
Introduction to the Grand Jury.
Although the IRS usually conducts the initial phases of the investigation as an IRS
administrative investigation, the grand jury and its processes will be used to fill any holes in the IRS
investigation. Furthermore, some tax investigations for one reason or another effectively start out
in the grand jury. And, of course, the grand jury must generally indict. Hence, it is important to
understand the grand jury.1294
In United States v. Williams,1295 the Supreme Court addressed the nature of the grand jury
as follows:
Rooted in long centuries of Anglo-American history, the grand jury is
mentioned in the Bill of Rights, but not in the body of the Constitution. It has not
been textually assigned, therefore, to any of the branches described in the first three
Articles. It is a constitutional fixture in its own right. In fact the whole theory of its
function is that it belongs to no branch of the institutional Government, serving as
a kind of buffer or referee between the Government and the people. Although the
grand jury normally operates, of course, in the courthouse and under judicial
auspices, its institutional relationship with the Judicial Branch has traditionally been,
so to speak, at arms length. Judges direct involvement in the functioning of the
1293
FRCrP Rule 41(f). The issue is often presented prior to the criminal trial in a Franks
hearing. In Franks v. Delaware, 438 U.S. 154 (1978), the Court established the right to challenge
the veracity of statements in an affidavit supporting a warrant for search or seizure. The Franks
hearing is also required if the affiant intentionally or recklessly omitted material information from
the affidavit in support of the search warrant. United States v. Carmel, 548 F.3d 571, 577 (7th Cir.
2008).
1294
A good readily available source on the general nature of the federal grand jury is a
CRS report, Charles Doyle, The Federal Grand Jury (Updated 1/22/08) which may be downloaded
here: http://www.fas.org/sgp/crs/misc/95-1135.pdf. I have relied significantly upon this
publication, particularly in obtaining support contained in the footnotes for propositions stated in
the text. I will cite this publication as Doyle, supra, with a page and, where appropriate, a footnote
number.
1295
504 U.S. 36, 47 (1992). I have omitted some citations, text and quotation marks for
readability.
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grand jury has generally been confined to the constitutive one of calling the grand
jurors together and administering their oaths of office.1296
Grand jury panels have sixteen to twenty-three members.1297 Sixteen members are required
for a quorum, and 12 must concur to indict.1298 The grand jury is led by a foreperson named by the
district court.1299 The district court also instructs the grand jury.1300
Based on this foundation and its permutations, the Court in Williams said that the Courts
have virtually no supervisory authority over grand juries. Who does supervise the grand jury? From
an authority standpoint, probably no one except the grand jury itself,1301 subject to the ultimate
power of the district court to discharge the grand jury panel at any time.1302 Setting authority aside,
however, the Government attorney, referred to as a prosecutor is usually in practical control of the
grand jury.1303 The prosecutor brings matters to the attention of the grand jury and generally
1296
For more detailed discussions of the grand jury, see Paul S. Diamond, Federal Grand
Jury Practice and Procedure (2001 ed., supplemented periodically); and a quite good discussion of
the federal grand jury in the DOJs Anti-Trust Division Grand Jury Manual (the practitioner should
take caution, however, at the materials, for just as the DOJ Tax CTM, it often states the
Governments position rather than giving a balanced exposition of the law; the practitioner may find
it a helpful rough and ready resource but should research on any aspect presented that may be
critical to the client).
1297
18 U.S. C. 3321; FRCrP 6(a).
1298
See Doyle, supra, p. 7, notes 31 and 32.
1299
FRCrP 6(c).
1300
Doyle, supra, p. 8 at n. 40 (noting in the footnote that, although not required by
statute or rule, this practice has developed over a long period of time.
1301
We should not assume that the grand jury foreperson controls the grand jury by
virtue of his or her office as foreperson. The Supreme Court describes the grand jury foreperson as
follows (Hobby v. United States, 468 U.S. 339, 344-45 (1984)):
The responsibilities of a federal grand jury foreman are essentially clerical in nature
administering oaths, maintaining records, and signing indictments. The secrecy
imperative in grand jury proceedings demands that someone mind the store, just
as a secretary or clerk would keep records of other sorts of proceedings. But the
ministerial trappings of the post carry with them no special powers or duties that
meaningfully affect the rights of persons that the grand jury charges with a crime,
beyond those possessed by every member of that body. The foreman has no
authority apart from that of the grand jury as a whole to act in a manner that
determines or influences whether an individual is to be prosecuted. Even the
foreman's duty to sign the indictment is a formality, for the absence of the foreman's
signature is a mere technical irregularity that is not necessarily fatal to the
indictment.
1302
FRCrP 6(g) (grand jury serves until the court discharges it.).
1303
United States v. Sells Eng'g Inc., 463 U.S. 418, 430 (1983) (noting that the grand jury
would be much less effective without orchestrating role provided by the prosecutor); In re Grand
Jury Proceedings, 219 F.3d 175, 189 (2d Cir. 2000) (the grand jury is an accusatory body under the
- 523 -
choreographs the marshaling of evidence and witnesses the grand jury considers in the investigation
and decision to indict. The prosecutor leads the questioning of witnesses, although grand jurors can
ask their own questions. The prosecutor explains the law to the grand jurors. The prosecutor
presents draft indictments to the grand jury for grand jury approval. Grand jurors can but rarely
will set their own agenda apart from the prosecutor.1304 A noted jurist is reported to have said that,
upon directions from the prosecutor, a grand jury would indict a ham sandwich.1305
Grand juries do not determine the guilt or innocence of a putative defendant. They determine
whether, on the basis of the evidence they have been presented, the grand jury will indict.1306 Hence
they can, and usually do hear a one-sided view of the facts, although as the Court noted in Williams
DOJ attorneys are admonished by internal rules to provide exculpatory evidence. Whether they do
or not in any given case is usually not known because of the grand jury secrecy rule,1307 but even if
they do not present exculpatory evidence there is little that can be done about it under Williams.
While certainly not indicative of daily grand jury practice, one federal prosecutor reported
that he obtained 15 indictments in 45 minutes!1308 Of course, the risk in the system is that the grand
jury, at the urging of the prosecutor, will confuse your client with the ham sandwich he really seeks
to indict or, more likely, will not differentiate your client when sandwiched in among 14 other really
bad characters.
(almost) complete control of the prosecutor); 1 Charles A. Wright & Andrew D. Leipold, Federal
Practice & Procedure 101, at 289 (4th ed. 2008) (It is . . . easy to overstate the grand jury's
independence from the prosecutor. It is the prosecutor who decides what investigations to pursue,
what documents to subpoena, which witnesses to call, and what charges to recommend for
indictment.)
1304
This is often referred to as a runaway grand jury which has been defined as a grand
jury in which the grand jurors have taken control of an investigation and are ignoring a prosecutor's
efforts to rein them in. Federal Grand Jury FAQs, University of Dayton School of Law site here:
http://campus.udayton.edu/~grandjur/faq/faq8.htm.
1305
Leipold, Why Grand Juries Do Not (And Cannot) Protect the Accused, 80 Cornell
L. Rev. 260, 263 (1995).
1306
I have phrased the question to be whether the grand jury will indict. The grand jury
is supposed to indict only where it finds probable cause to believe that a crime has been committed
by the putative defendant. Grand juries traditionally, however, can return a no bill (grand jury
jargon for declining to indict) for almost any reason they choose. Thus, they may return a no bill
to an indictment requested by the prosecutor even if the quantum of the evidence is sufficient to
meet the probable cause. This is a variation on a theme of jury nullification. Indicted defendants
have questioned whether the grand jury instructions given the grand jury to guide its deliberations
adequately advise the grand jury of its right to return a no bill in such circumstances. See e.g.,
United States v. Navarro-Vargas, 408 F.3d 1184 (9th Cir. 2005) (en banc); and United States v.
Simkanin, 420 F.3d 397 (5th Cir. 2005), cert. den. 547 U.S. 1111 (2006).
1307
FRCrP Rule 6(e).
1308
Bernstein, Behind the Gray Door: Williams, Secrecy, and the Federal Grand Jury,
69 N.Y.U.L. Rev. 563, 573 (1994) (raising concerns as to the real independence of the grand jury).
- 524 -
The AUSA or DOJ Tax attorney will present the case to the grand jury. If further
investigative work is required or if assistance is needed to explain the case to the grand jury (likely
in tax cases), an IRS Special Agent, usually the same agent conducting the investigation, will be
assigned to assist the grand jury.1309
Although it may be poor consolation to an indicted defendant, particularly one ultimately
convicted, there are some remedies for abuses of the grand jury process but almost none of which
will benefit the defendant.1310 In this regard, there have been relatively recent attempts to reform the
grand jury process to build more protection in for persons within its grips.1311
Grand jury proceedings are not conducted in public, and grand jury matters are required to
be secret.1312 (I discuss grand jury secrecy below.).
2.
The Grand Jury Subpoena.
The grand jury subpoena has been called the Governments most powerful tool in the
investigation of white collar crimes (of which tax crimes are a subset).1313 Tax crimes, particularly
the sophisticated multi-layer schemes such as widely promoted tax shelters to the rich (or so the
Government imagines, are just a subset of white collar crimes and thus investigation and ultimate
prosecution can benefit from the grand jury subpoena.
The grand jury subpoena is not available while the tax investigation is solely administrative
that is, before referral to CES. (You will recall that, before referral, the IRS can use the IRS
administrative summons; after referral and while the referral is in effect, the IRS administrative
summons cannot be used and the grand jury subpoena is the only compulsive investigative power,
1309
FRCrP Rule 6(e)(3)(A)(ii).

See e.g. Bank of Nova Scotia v. United States, 487 U.S. 250, 263 (1988); United
States v. Mechanik, 475 U.S. 66, 70 (1986); United States v. Flores-Rivera, 56 F.3d 319, 328 (1st
Cir. 1995) (indictment generally will not be dismissed unless defendant was prejudiced by errors
in the grand jury proceedings); United States v. Anderson, 61 F.3d 1290, 1296 (7th Cir. 1995)
(district court generally may not dismiss indictment based on prosecutorial misconduct unless
defendant was prejudiced); United States v. Pacheco-Ortiz, 889 F.2d 301, 310-11 (1st Cir. 1989)
(harmless error where prosecutor violated Department of Justice policy requiring that defendant be
warned prior to his grand jury testimony that he was target); see also Bennett L. Gershman, The New
Prosecutors, 53 U. Pitt. L. Rev. 393, 435 (1992) (Bank of Nova Scotias clear message to lower
courts is that sufficient proof of guilt will insulate almost any amount of prosecutorial misconduct
from reversal).
1311
See Federal Grand Jury Reform Report & Bill of Rights, 24 Champion 16 (July
2000).
1312
FRCrP Rule 6(e).
1313
This statement is common knowledge to those in the white collar crime business, and
I have support for the statement as I develop this section. However, if a cite is needed for this rather
obvious proposition, see Ronald G. White and Michael Gerard, Grand Jury Subpoenas and the Fifth
Amendment Privilege, A-1 (ABA White Collar Criminal Conference 3/5/2008).
1310
- 525 -
other than the search warrant.) Often, the investigation is complete at the time of the IRS CI referral
and therefore the grand jury phase may consist only of presenting the already developed evidence
to the grand jury for its indictment of the target. If, however, further investigation beyond the IRS
CI investigation or, as is increasingly happening, the criminal tax investigation effectively starts as
a grand jury investigation, the grand jury investigation and opportunity for intimidation can be
deployed. The grand jury subpoena coupled with the management of the process by seasoned
prosecutors can be a powerful juggernaut.
How does the grand jury subpoena compare with the IRS administrative summons? If you
are the Government, it is a much better tool for efficient investigation.1314 If you are the target, well
efficiency is not everything!!! But lets see how the grand jury subpoena is efficient for those
appreciating its investigative efficiency.
First, a grand jury subpoena is self-enforcing in that failure to comply is itself a contempt,
whereas an IRS administrative summons is not self-enforcing and requires a subsequent summons
enforcement action in the district court to obtain a court order that a witness then must comply with
under penalty of contempt.1315 Moreover, an order enforcing a grand jury subpoena is not appealable
and the only way to obtain appellate review is to stand in contempt.1316 By contrast, elaborate
judicial procedures, including judicial review prior to conduct that could be held contemptible, are
applicable to administrative summonses.1317
Second, the witness before the grand jury cannot have his attorney present, whereas the
witness appearing pursuant to an IRS summons has the right to have his attorney present. Although
the witness can certainly leave the grand jury room to seek counsel, there is tremendous and none
too subtle pressure to not do that or keep it to a minimum, so that a witnesss rights may be
prejudiced.
Third, any IRS administrative summons to a third party requires notice to the taxpayer
involved under the rules discussed above (i.e., in all cases except criminal investigations, in which
case only summonses to third party record keepers requires notice), does not allow the investigator
serving the summons to obtain instant access, and allows the taxpayer an opportunity to contest, thus
potentially tying up the investigation for long periods of time.1318 Perforce, when third party
summonses requiring notice are involved, the taxpayer will know of both the existence of the
investigation and the direction of the investigation by notice as to the types of information the IRS
seeks. The grand jury subpoena, by contrast, has no notice requirements, so that the taxpayer will
1314
See generally Saltzman, supra, at par. 13.04[3], pp. 13-44 -13-54. See also Webster
Report, pp. 34 & 35 outlining at least some perceived inadequacies of the IRS summons as
compared to the grand jury subpoena.
1315
See generally as to the inefficiencies in the IRS administrative summons, Saltzman,
IRS Practice and Procedure (2d ed. 1991, with current supplement), at par. 13.04, pp. 13-37 - 13-54.
1316
See e.g., United States v. Millstone Enterprise, Inc., 864 F.2d 21, 23 (3rd Cir. 1988).
1317
See Church of Scientology of California v. United States, 506 U.S. 9 (1992); and see
Saltzman, supra.
1318
Section 7609.
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not necessarily be advised of the existence or direction of the investigation. Indeed, as to some
grand jury subpoenaes, notifying the target of the subpoena is punishable as an obstruction of
justice.1319
Fourth, the grand jury subpoena is generally perceived as being more serious and requiring
more prompt and serious attention than the IRS administrative summons.1320
This power in the grand jury does come with limitations that have significant applicability
in tax contexts. Grand jury matters cannot be shared with the IRS to develop its civil tax position
without a pending judicial proceeding and, in connection therewith, a court order.1321 So, in order
to obtain the more efficient process by pursuing an investigation by grand jury, the IRS may limit
its use of the fruits of the investigation in the ongoing civil tax investigation.
Courts have recognized one limitation on the use of the grand jury subpoena where a
defendant has been indicted and subsequent grand jury subpoena is issued for testimony or
documents that might not be available under the discovery limitations in the pending criminal case.
If the sole or dominating purpose is to gather evidence for the pending criminal case, the subpoena
may be quashed.1322 However, in order not to limit the grand jury process, courts generally require
a strong showing of improper use of the grand jury subpoena.1323
Finally, one seasoned prosecutor has noted that, in many cases, the grand jury subpoena may
even be preferable to a search warrant in cases where the prosecutor could show probable cause to
obtain the search warrant:
Proceeding by subpoena, rather than search warrant, will draw defense counsel into
the process of sifting through documents, a process that might otherwise be quite
onerous for a prosecutor in a white-collar case involving cartloads of documents.
This involvement can make a prosecutor's life much easier, particularly when she has
confidence in counsel's integrity, and the cost materials withheld based on
aggressive invocations of privilege will not be obvious.1324
1319
18 U.S.C. 1510(b) (imposing felony 5 year punishment if financial institution

discloses with intent to obstruct and misdemeanor one year if it discloses without intent to obstruct).
1320
Webster Report, supra, pp. 34-35.
1321
FRCrP Rule 6(e)(3)(C)(i); for further development of this critical limitation, see the
discussion below beginning at p. 530.
1322
In re Grand Jury Subpoena Duces Tecum Dated January 2, 1985 (Simels), 767 F.2d
26, 29 (2d Cir. 1985); see also United States v. Dardi, 330 F.2d 316, 336 (2d Cir. 1964). In United
States v. Ohle, 678 F.Supp.2d 215, 233-234 (SD NY 2010), the court rejected a similar argument
as to the improper use of the IRS audit and summons power to support the filed criminal case. If,
indeed, the use of these powers had a strong odor piscatorial, a court would remedy the abuse.
1323
United States v. Ohle, 678 F.Supp.2d 215, 233-234 (SD NY 2010).
1324
Daniel C. Richman, Grand Jury Secrecy: Plugging the Leaks in an Empty Bucket,
36 Am. Crim. L. Rev. 339, 345 n. 33 (1999)
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3.
Target or Subject Appearance Before the Grand Jury.
Generally, in federal criminal cases, targets or subjects are not subpoenaed and, if the
prosecutor or grand jury feels a need to hear from a target or subject, the prosecutor will normally
invite the target or subject to appear rather than issuing a subpoena compelling the appearance.1325
Sometimes, targets or subjects request the opportunity to appear before the grand jury.1326
Indeed, prosecutors are encouraged to notify targets that they may testify before the grand jury.1327
Prosecutors generally advise the target or subject appearing before a grand jury in writing before the
grand jury and orally at the start of the testimony that he or she has the right to remain silent on Fifth
Amendment grounds and that advice is viewed as important in negating any possible compulsion
to self-incrimination which might otherwise exist in the grand jury setting.1328
Generally, of course, well-advised targets or subjects of the investigation invoke the Fifth
Amendment privilege to the questions the prosecutor and/or grand jury would want to ask. Thus,
the target or subject will normally decline any invitation or opportunity to testify. And, if the target
is subpoenaed to testify, he should usually be able to avoid having to appear by simply advising the
prosecutor in writing that he or she will assert the Fifth Amendment.1329 Although the latter is a
blanket assertion of the Fifth Amendment, it is generally considered better form for the prosecutor
to honor it rather than forcing the witness to assert the Fifth Amendment before the grand jury
responsible for indicting him. (The same policies apply as prohibit the prosecution from forcing the
defendant at trial to the stand to assert the Fifth Amendment.) So, it is unlikely, except in the rarest
of cases, that a target or subject would actually testify and assert the Fifth Amendment on a question
by question basis.
If the target or subject does appear before the grand jury, he or she will be read the modified
Miranda rights (which may also be appended to the subpoena if a grand jury subpoena is used).1330
1325
USAM 9-11.150. Target and subject are defined as follows (USAM 9-11.151):
A target is a person as to whom the prosecutor or the grand jury has
substantial evidence linking him or her to the commission of a crime and who, in the
judgment of the prosecutor, is a putative defendant. An officer or employee of an
organization which is a target is not automatically considered a target even if such
officers or employees conduct contributed to the commission of the crime by the
target organization. The same lack of automatic target status holds true for
organizations which employ, or employed, an officer or employee who is a target.
A subject of an investigation is a person whose conduct is within the scope
of the grand jurys investigation.
1326
USAM 9-11.152.
1327
USAM 9-11.153.
1328
USAM 9-11.151; see United States v. Washington, 431 U.S. 181, 188 (1977); United
States v. Mandujano, 425 U.S. 564, 582 n. 7. (1976). There is no requirement that the witness be
advised of the consequences of committing perjury. United States v. Mandujano, supra.
1329
USAM 9-11.154.
1330
USAM 9-11.151.
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As I am sure you appreciate from the foregoing, the grand jury powers to gather information
are broad indeed. Not only is the subpoena power much more efficient and summary than the IRS
administrative summons, the use of other grand jury processes can be much more efficient.
Witnesses thus may be subpoenaed to appear before the grand jury without their counsel present.1331
The witnesses are alone in the grand jury room with the grand jurors, the prosecutor and sometimes
a stenographer. The prosecutor is there to prosecute and almost always is the one who instigated
the proceeding. The prosecutor is generally not the witnesses friend. He is there to use persuasion
and coercion to achieve his goal of obtaining an indictment (in the case of a charging grand jury)
and obtaining information to make his case (in the case of an investigating grand jury).
4.
Assertion of the Fifth Amendment in Grand Jury Proceedings.
The drill for asserting the Fifth Amendment privilege to questions inside the grand jury room
is the same as in other contexts the witness will have to listen to each question and assert the
privilege to answering each question. The grand jury setting is, however, very different than other
contexts because the witness attorney is not permitted in the grand jury room to deal in real time
with the nuances of the questions and possible ways in which responsive answers could incriminate.
While the witness may consult with his or her attorney at any time in the questioning process, but
for a variety of reasons it might not be prudent to consult the attorney after each question and,
moreover, the witness might not remember the question precisely as asked even though the witness
just heard it. So, the better part of wisdom is for the witness to assert the privilege more broadly in
the grand jury room than the witness might have in a forum in which the attorney was present and
participating. Thus, the Supreme Court said in United States v. Grunewald, 353 U.S. 391, 422-423
(1957):
[T]he Fifth Amendment claim was made before a grand jury where Halperin was a
compelled, and not a voluntary, witness; where he was not represented by counsel;
where he could summon no witnesses; and where he had no opportunity to
cross-examine witnesses testifying against him. These factors are crucial in
weighing whether a plea of the privilege is inconsistent with later exculpatory
testimony on the same questions, for the nature of the tribunal which subjects the
witness to questioning bears heavily on what inferences can be drawn from a plea of
the Fifth Amendment. See Griswold, supra, at 62. Innocent men are more likely to
plead the privilege in secret proceedings, where they testify without advice of
counsel and without opportunity for cross-examination, than in open court
proceedings, where cross-examination and judicially supervised procedure provide
safeguards for the establishing of the whole, as against the possibility of merely
partial, truth.
1331
United States v. Mandujano, 425 U.S. 564, 581 (1976) (no witness right to counsel
in grand jury room).
- 529 -
5.
Grand Jury Secrecy.
Rule 6(e), Federal Rules of Criminal Procedure, requires that grand jury matters be kept
secret and thus can be used only for the prosecution of the case if an indictment is brought.1332 This
means, most importantly, that the grand jury matters cannot be disclosed to other government
attorneys or agencies (including the IRS) for purposes unrelated to the criminal investigation and
prosecution if an indictment is brought.1333 Most specifically in the current context, that the grand
jury information cannot be disclosed to the IRS for use in asserting a civil tax liability against the
taxpayer under investigation. It is true that, if the grand jury indicts and the fruits of the grand jury
investigation are used in the prosecution, the IRS can then make civil use of the fruits thus made
public in the prosecution, but often the grand jury will not indict or, if it does indict, only the matters
related to the criminal case (e.g., the criminal numbers discussed above) will be made public in the
prosecution. The nonpublic grand jury matters could include a host of information that would be
relevant to the ultimate civil tax liability that the IRS simply cant get to so long as Rule 6(e) is
complied with.
Because of these strict limitations on use of grand jury matters, in forwarding a case to the
DOJ Tax, the IRS usually will be careful to catalog the information it developed through its
administrative investigation prior to any use of the grand jury. The information developed in the
administrative investigation may be used by the IRS for civil tax purposes as well as criminal
purposes.
The key to grand jury secrecy is the term grand jury matters a term that is hardly
descriptive except in the most general sense. Testimony of a witness in the grand jury room is
clearly grand jury matters. Documents obtained pursuant to grand jury subpoena are probably also
covered.1334 What about testimony or witness statements obtained by the assistants to the grand jury
outside the grand jury but obtained under threat of grand jury subpoena? What about documents
obtained by those assistants under threat of grand jury subpoena? What about documents obtained
pursuant to a search warrant obtained incident to the grand jury investigation? My own research
which I cant catalog here indicates that in these contexts the term grand jury matters may be
somewhat fluid to mean whatever the Government wants it to mean i.e., if the Government wants
to share the information free of the grand jury secrecy rules, it will deem the information not grand
jury matters;1335 but if the Government wants to resist giving the information to someone it does
1332
A good article on the grand jury secrecy imperative is in, see Mark Kadish, Behind
the Locked Door of an American Grand Jury: its History, its Secrecy, and its Process, 24 Fla. St. U.
L. Rev. 1 (1996).
1333
See United States v. Sells Engineering, Inc., 463 U.S. 418 (1983); and United States
v. Baggot, 463 U.S. 476 (1983).
1334
Keep in mind that the grand jury secrecy rules do not shield any copies retained by
the subpoenaed witness from discovery, whether by the IRS or any other person entitled to discovery
against that witness. All it subjects to secrecy is the documents that the grand jury holds pursuant
to the subpoena, so that third parties, including the IRS, cant get the documents from the grand jury.
1335
For example, in the grand jury investigation of KPMG for its so-called abusive tax
shelters noted earlier, the AUSAs prosecuting the grand jury investigation routinely invite subjects
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not want to have it, the information will be deemed grand jury matters not subject to disclosure.
The courts usually tolerate and support this nonsense without developing a universally applicable,
principled definition of the term that is applicable regardless of whose ox is being gored.
The prohibition on disclosure applies only to the grand jury and those assisting the grand
jury. Witnesses appearing before the grand jury are allowed to disclosure their testimony even
though it constitutes grand jury matters.1336 Furthermore, merely because documents have been
produced pursuant to grand jury subpoena does not require that the subpoenaed party keep the
records secret.
6.
Grand Jury Investigations in Large Tax Cases.
Bottom line, in big criminal tax investigations e.g., the investigations of the accounting
firms for hawking allegedly abusive tax shelters the grand jury investigation is far superior to the
IRS criminal investigation. I have noted above that the grand jury subpoena is far superior and the
grand jury secrecy rules give potential witnesses more comfort than they may have with the Section
6103 rules. Moreover, the grand jury investigation is managed by seasoned DOJ prosecutors who
know what the needs and subtleties of prosecution are and do not have to guess at it as do CI
investigators who must operate without the guidance of the seasoned prosecutors.
V.
Sting Operations.
The IRS uses sting operations, often in conjunction with other agencies such as the FBI.
When other agencies are used, it would seem that the limitations of 6103, which limits the IRSs
ability to share the fruits of its investigation with other agencies, may require that the investigation
and sting operations be conducted through a task force connected to a grand jury investigation.
You will recall that the money laundering provisions expressly contemplate sting
operations.1337
and targets in for a proffer session, often specifically in lieu of a grand jury subpoenaed appearance.
Those AUSAs are apparently taking the position that the information learned during the proffer
sessions is free of the secrecy requirement of Rule 6(e) and appear to be providing the information
to the IRSs Office of Professional Responsibility for civil action / retribution against persons being
investigated by the grand jury.
1336
Moreover, a court has recently held that a witness appearing before the grand jury
is entitled to review the transcript of his or her testimony. In Re: Grand Jury, 490 F.3d 979 (D.C.
Cir. 2007),
1337
1956(a)(3).
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VI.
International Evidence Gathering.

A.
Introduction.
The explosive growth of international business the global economy, if you will has been
accompanied by an explosive growth in tax fraud across international boundaries. The simple
model, present and used since virtually the inception of the modern income tax, is the use of an
offshore bank account in a country whose secrecy laws place a premium upon hiding the existence
and ownership of the account and thus the taxable income that is in the account. An infinite number
of more complex cross-border tax fraud models exist, including concealing the existence of foreign
investment accounts, reporting foreign sham transactions where the IRSs ability to discover the
sham is more limited than if the transactions occurred in the U.S., manipulating the complex foreign
tax deferral regimes for foreign corporations controlled by U.S. persons, and manipulating transfer
pricing so that income is pushed from the United States into foreign tax haven countries. I address
here the common IRS tools to gather evidence of the U.S. tax fraud.1338
B.
Prototypical U.S. International Tax Fraud.
As I mentioned above, the prototypical cross-border tax fraud is the use of a foreign bank
account in a tax haven. We addressed this gambit above in discussing the use of the John Doe
Summons procedure to get information from the credit card companies whose cards were used by
tax haven banks to give their secret depositors access to the hidden cash. A simple model is for a
taxpayer with a cash business to divert some portion of the cash to the foreign bank account so that
the IRS will not be able to discover the extra income. This is just the cross-border analog to burying
the cash in the back yard. The advantage of the foreign bank account is that the cash is not subject
to the ravages of weather and critters (worms, etc.) and can draw some extra return (e.g., interest,
dividends and capital gain, depending upon how invested) that the taxpayer also will not report for
tax purposes. Of course, merely spiriting the cash out of the country may be a separate criminal act
(e.g., failing to file the CTRs required on departing the U.S. with more than $10,000 of cash). But
we are focusing here upon the mere act of hiding the cash representing taxable income in a place
that, if it works, the IRS is unlikely to discover.
The taxpayer will then effectuate his or her tax fraud by not reporting the income on the
return and, in order to conceal the existence of the foreign bank account, answering no to -- or
cleverly failing to answer -- the question on the tax return (Schedule B) about ownership interest in
or signatory control over foreign bank accounts. (The latter question and instructions advise the
1338
I have relied significantly upon two excellent articles in preparing this portion of the
materials. The first is by two outstanding criminal tax practitioners in developing this section of
these materials. That article is Cono Namorato and Scott Michel, International Criminal Tax Cases,
U. Miami L. Rev. 617 (1996). The second is Springer, Overview of International Evidence and
Asset Gathering in Civil and Criminal Cases, 22 Geo. Wash. J. of Intl Law and Economics 278
(1988). I refer the reader to those articles, but I have tried to capture here the more important
themes, both from the article and from my own experience and have updated for more recent
developments.
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taxpayer to his or her responsibility to file the FBAR, Form 90-22.1) At that point, the taxpayer has
violated 7201 (tax evasion) and 7206(1) (tax perjury), and upon failure to file the FBAR has also
violated another statute. Of course, if the taxpayer had some assistance in effecting the transaction
(e.g., a business partner or even a family member who actually took the cash to the tax haven), he
or she may be guilty of a Klein conspiracy. And, as noted there could be a host of related problems
(such as getting the cash out of the country, etc.).
Note that parking assets in tax haven countries can also be used for evasion of payment
where the tax liability has been determined and the taxpayer simply does not want to pay. As
discussed above, 7201 covers both evasion of assessment and evasion of payment.
Other types of more sophisticated cross-border tax fraud came to the surface in the late 1970s
and 1980s as many taxpayers invested in various tax shelter schemes, some of which depended upon
the secrecy laws of foreign countries and the IRSs relative inability to discover and investigate the
tax fraud. One such scheme, with various iterations, used foreign trusts in such exotic places as the
Isle of Mann. The foreign trusts, which the promoters and the taxpayer hoped could not be pierced
for information, would acquire property or assets with the view toward the taxpayer not reporting
the income or, if the taxpayer had large debts (including tax debts), the creditor not discovering the
taxpayers real interest in the trust.
Such cross-border schemes offer fertile ground for criminal investigations and prosecutions,
although some are blessed with such legal complexity (because of the complex interplay of the
various tax rules) that it may be difficult to make a criminal case.1339
C.
Tax Treaties and International Comity.

1.
Introduction.
We covered above the tools that are generally available to the IRS in its investigations. The
IRS administrative summons and the grand jury subpoena require U.S. jurisdiction over the person
summonsed or subpoenaed in order to establish the constitutional nexus for sanctions for failure to
comply. That means that, for example, a Swiss bank with no U.S. nexus (such as a branch office
in the U.S.) is beyond the summons power and the subpoena power. These traditional investigative
tools are not available. At a more subtle level, the IRS relies upon the requirement that various
businesses such as banks file CTRs to report cash deposits or cash transactions, and our example
Swiss Bank is beyond the U.S.s power to impose such an obligation. Is the U.S. stymied from
developing the facts? In this section I discuss International Treaties and Comity avenues for
obtaining information from other countries.1340
1339
See e.g., United States v. Dahlstrom, 713 F.2d 1423 (9th Cir. 1983), cert. denied, 466
U.S. 980 (1984), which is a variation on the theme presented in the Garber case.
1340
Good discussions may be found in articles found in the ABA publication titled
Criminal Tax Fraud 2004. The articles are James P. Springer, Obtaining Evidence Abroad for
Criminal and Civil Tax Matters, and Bruce Zagaris, Evidence Gathering in International Penal
Cases. Obviously, this subject is much larger than can be summarized here.
- 533 -
2.
Treaties.
a.
Double Tax Treaty - Information Exchange.
The U.S. has a so-called double tax treaty with most developed and many developing
countries. These treaties have an exchange of information article.1341 Under that provision, one
treaty partner may request the other partner to use its internal evidence gathering processes to obtain
information relevant to tax administration of the requesting treaty partner. The request is made by
the requesting countries designated officer (referred to in treaty parlance as competent authority)
to the parallel designated officer (also, the competent authority) in the other country.
Thus, U.S. treaty partners may request the U.S. to use its evidence gathering authority -principally the IRS administrative summons -- to gather information for use in the treaty partners
tax administration. The IRS views its authority to gather information for the treaty partners quite
broadly, and the U.S. Courts do also. Thus, for example, although the IRS administrative summons
may not be used for U.S. purposes when the criminal investigation has reached the DOJ referral
stage,1342 the IRS administrative summons may be used to obtain information for a treaty partner
regardless of the stage of the treaty partners investigation. See United States v. Stuart.1343
Furthermore, the Powell analysis must be modified in order to have the relevancy and scope
determined by reference to the treaty partners taxes, rather than U.S. taxes.
b.
OECD Convention on Tax Administrative Assistance.
The U.S. is a signatory to the OECD Convention on Mutual Administrative Assistance in

Tax Matters, a multilateral tax treaty among members of the OECD who have ratified it.1344 The
U.S. has ratified the treaty subject to certain reservations which, in effect, exempt the U.S. from
obligations under the treaty to the extent of the reservations.1345 The provisions of this convention
are solely procedural. The U.S. has a Double Tax Treaty containing exchange of information
provisions with most OECD countries that would ratify this Convention, but the Convention goes
beyond the Double Tax Treaty in some respects. As explained in the Technical Explanation
accompanying the treaty:
Although the United States has with most OECD member States bilateral
income tax treaties that contain exchange of information provisions, the Convention
provides a comprehensive and uniform framework for exchanges of information that
1341
See e.g., the U.S. Model Income Tax Treaty, which is the starting point for the U.S.
treaty negotiations, has an exchange of information article (Article 26).
1342
Section 7602(d).
1343
489 U.S. 353 (1989).
1344
Currently, the ratifying countries are: Belgium, Denmark, Finland, Iceland,
Netherlands, Norway, Poland, Sweden, and the U.S.
1345
In determining each states obligations under multilateral treaties, both the treaty text
and that states reservations, if any, must be considered.
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is broader, in some respects, than the provisions in some bilateral treaties to which
the United States is a party. In this connection, the Convention contains, in Article
20(3), more explicit requirements concerning the form in which information will be
transmitted than do some of the United States bilateral treaties. Requirements
concerning the form of the information provided are routinely incorporated into our
Tax Information Exchange Agreements (TIEAs), which are executive agreements
concluded under the authority of section 274(h)(6)(c). Also, Article 5(2) of the
Convention requires the requested State to do more than some States are currently
doing under bilateral treaties to which the United States is a party by requiring a
requested State that cannot satisfy a request from information in its own tax files to
take relevant measures to obtain the information necessary to fulfill the request. This
requirement is also consistent with our TIEAs.
The Convention does not override any bilateral treaties to which the United
States is a party. In this regard, Article 27 of the Convention provides that the forms
of assistance as well as procedures specified in the Convention do not limit, nor are
they limited by, the provisions of existing or future agreements between the
Contracting States. The application of this Convention and of other instruments are
to be considered independently; the Parties may invoke whichever instrument they
think will be most effective in a particular case.
The Convention contains strong and explicit protections of taxpayer rights.
For example, Article 21(1) states that the Convention does not affect any taxpayer
safeguards secured by a requested States laws or administrative practices.
c.
MLATs.
One such treaty is the Mutual Legal Assistance Treaty (often referred to acronymically as
an MLAT).1346 MLATs establish procedures for obtaining a broad range of assistance from the
treaty partner for use in criminal matters generally. MLATs are individually negotiated treaties and,
while they have features in common, some are more restricted than others in terms of the
circumstances in which they may be used. Most MLATs cover the significant criminal tax felonies,
but some (e.g., the Swiss MLAT) exclude those felonies except for organized crime. The types of
assistance available includes locating or identifying persons in the treaty partner state, taking
testimony of persons in the treaty partner state, obtaining documents and other types of evidence in
the treaty partner state through treaty partner legal processes (e.g., in the United States as to a treaty
partner request, via summons or through search warrants), and other types of remedies more
commonly encountered in nontax crimes. Information and documents obtained through the process
may be subject to initial limitations on use (i.e., for the purposes enumerated in the MLAT), but if
the information or documents become public record for the intended use (e.g., in a criminal trial),
they may be used for other purposes.
1346
This discussion of MLATs is summarized from James P. Springer, Obtaining

Evidence Abroad for Criminal and Civil Tax Matters, pp. D-2 - D-5 included in the ABA
publication titled Criminal Tax Fraud 2004.
- 535 -
d.
TIEAs.
Another type of treaty with a similar goal to allow each treaty partner access to information
in the jurisdiction of the other treaty partner is a Tax Information Exchange Agreement (also referred
to as a TIEA). TIEAs are executive branch agreements entered under some other authorization
(such as a statute or treaty). The U.S. has TIEAs with more than 50 countries. Each is individually
negotiated, but are generally quite similar in language and content.
(1)
Caribbean Basin Initiative.
TIEAs have been most prominent in the so-called Caribbean Basin Initiative (the popular
name for the Caribbean Basin Economic Recovery Act). Some Caribbean countries have been
notoriously uncooperative in sharing information with the U.S. for tax purposes and indeed have
built major economies by promoting that noncooperation. In some of these countries, financial
industries with secrecy as their main attraction are a large component of the local economies. As
a result, these countries have been unwilling to enter into agreements or relationships that would
undermine their local financial industries. Under the CBI, countries that enter into TIEAs with the
United States gain certain trade benefits, thus giving them a financial incentive that may override
their financial interest in maintaining strict secrecy for foreign customers of their financial
institutions.
The CBI TIEA provides for the exchange of such information as may be necessary or
appropriate to carry out and enforce the tax laws of the United States and the beneficiary country
(whether criminal or civil proceedings) including information which may otherwise be subject to
nondisclosure provisions of the local law of the beneficiary country such as provisions respecting
bank secrecy and bearer shares.1347 That is the general goal of the TIEA, but TIEAs are still
negotiated documents that may vary in their specific provisions and thus scope depending upon
the negotiating stance of the treaty states involved.1348 Thus, the statute permits the U.S. to enter
TIEAs that will limit the exchange of information for civil tax purposes if (1) the Secretary of
Treasury, after making reasonable efforts to negotiate an agreement which includes the exchange
of such information, determines that such as an agreement cannot be negotiated but that the
agreement was negotiated will significantly assist in the administration and enforcement of the U.S.
tax laws, and (2) the President determines that the agreement as negotiated is in the national security
interest of the U.S.1349 The determination of whether information is sought only for civil tax
purposes is made by the requesting party.1350
A TIEA provides for the exchange of information pursuant to specific requests, as well as
routine and spontaneous exchanges of information. If a party specifically requests, information will
1347
274(h)(6)(C)(i).
The discussion draft to commence negotiations for a TIEA and the related Technical
Explanation are reproduced in the IRM at Exhibit 42.2.6-1.
1349
274(h)(6)(C)(ii).
1350
274(h)(6)(C)(iv).
1348
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be furnished in the form of depositions of witnesses and authenticated copies of unedited original
documents (including books, papers, statements, records, accounts, and writings) in a form
admissible into evidence in the courts of the requesting country.1351 The authority and obligation
to exchange information extends to information with respect to persons who are not residents or
nationals of one of the contracting states.1352 The officials of each country have a duty not to disclose
information obtained under a TIEA other than to those involved in the countrys tax
administration.1353 The CBI TIEAs are treated as income tax conventions for purposes of section
6103(k)(4) of the Code which allows the U.S. to disclose information to tax treaty partners pursuant
to the exchange of information provision of such treaties.
The exchange may occur even if the country to whom the request for information is made
has no tax interest in the information. For example, if the CBI country exempts foreign passive
investments from tax, the mere fact that it has no tax interest will not prevent it from using its
processes to obtain information for the U.S. upon request.
U.S. enforcement at the request of the other party to a TIEA is discussed in Barquero v.
United States, 18 F.3d 1311 (5th Cir. 1994) involving the TIEA between the U.S. and Mexico. In
that case, the Mexican tax authority (through its treaty office referred to in treaty speak as the
competent authority) requested the U.S. counterpart (the U.S. competent authority) to obtain tax
information relating to a Mexican national. Pursuant to that request, the IRS served a U.S. bank with
an IRS summons. The Mexican national filed a motion in the district court to quash the summons.
The U.S. counterclaimed to enforce the summons. The Fifth Circuit upheld the constitutionality of
the TIEA and said that the IRS had authority to issue the summons. The Fifth Circuit also rejected
the taxpayers argument that the IRS issued the summons in bad faith, applying the Powell standard
to TIEA requests. As discussed above, the Powell minimal standard simply a showing of minimal
nexus and the absence of bad faith.
The United States has recently entered several TIEAs with Caribbean countries and more
will undoubtedly be entered.
(2)
Other TIEAs.
TIEAs may also be entered independent of the Caribbean Basin Initiative. For example, the
United States entered a TIEA with Bermuda in order to implement the Mutual Assistance in Tax
Matters provisions of a treaty between the U.S. and the U.K. TIEAs have thus recently been entered
with a number of non-Caribbean jurisdictions that are perceived as tax havens.1354
1351
1352
1353
1354
See H.R. Rep. No. 266, 98th Cong., 1st Sess. 30 (1983).
Id at 29.
Id .
E.g., recent TIEAs with Jersey and the Isle of Man since October of 2002.
- 537 -
e.
IRS Summonses and the Hague Convention.
The IRS takes the position that it may serve the IRS administrative summons abroad under
the Hague Convention on the Service Abroad of Judicial and Extrajudicial Documents in Civil or
Commercial Matters.1355 The IRS will apparently use this process, which is probably less effective
than under specific treaties, only where the specific treaties do not apply for some reason.1356
3.
Letters Rogatory.
a.
General.
A letter rogatory is a request from a court in one country to a judicial authority in another
country requesting service of process or compulsory production of testimony or documents against
a person subject to the jurisdiction of the latter country. The process is also referred to as a letter
of request, which is the term used in The Convention on the Taking of Evidence Abroad in Civil
or Commercial Matters of March 18, 1970 (the Hague Evidence Convention), a multi-lateral treaty
to which the U.S. is signatory. A request procedure may be made between signatories of the Hague
Evidence Convention or under MLATs. In the absence of an applicable treaty, the requests may be
made and received under traditional considerations of comity, but, without procedures and mutual
commitments, the process may be cumbersome and eventually ineffective, for, absent a treaty or
other agreement, there is no requirement that a country respond.
b.
By a Foreign Country To the United States.
28 U.S.C. 1781 permits the U.S. Secretary of State to receive requests from foreign
countries and to make such requests on behalf of a tribunal in the U.S. 28 U.S.C. 1782 permits
U.S. district courts to order a person within the district to give testimony or produce documents for
use in a proceeding in a foreign or international tribunal, including criminal investigations conducted
before formal accusation. The order may issue pursuant to a letter rogatory issued, or request
made, by a foreign or international tribunal or upon the application of any interested person. This
is broad and sweeping authority for district courts to order discovery at the request of foreign
governments (both courts and investigators) and even private parties.1357 Under 1782, the party
subject to the order may assert privileges.
1355
ILM 200143032 reprinted in 2001 WTD 210-29 (10/30/01).

For example, in ILM 200143032, supra, the IRS indicated that it would use the
process only because the treaty partner took the position that the exchange of information provision
of the double tax treaty applied only where it had a tax interest in the information sought and there
appeared to be no treaty partner tax interest. In that situation, the U.K. was the treaty partner and
the ILM notes that the recently negotiated tax treaty which is not yet in force, did eliminate the tax
interest requirement for invocation of the exchange of information provision.
1357
For a recent example of the use of 1782 to obtain a discovery order at the request
of Russian criminal tax investigators, see United States v. Sealed I, 231 F.3d 484 (9th Cir. 2000).
1356
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The historic rule of international comity in the tax area has traditionally been that courts of
one country will not enforce judgments for taxes issued by another country. From this basic legal
principle, courts have reached varying conclusions when tax-related issues other than enforcement
of judgments are concerned. However, in a relatively recent House of Lords decision in In re State
of Norways Application, [1988] 3 W.L.R. 603, the House of Lords held that one state does not
directly or indirectly enforce the revenue laws of another state by simply providing evidence that
the other state may use in enforcing its own laws. Whether other countries will follow suit is still
an open issue.
We did see this international comity rule once before in the Pasquantino case. In that case,
you will recall, the United States used evasion of Canadian taxes to support the crime of wire fraud.
The United States was thus using its criminal statutes to support compliance -- punish
noncompliance -- with foreign tax law. In Pasquantino, the Supreme Court resolved a conflict
among the circuits as to whether the wire fraud statute (and the companion mail fraud statute) could
be applied in the face of the revenue rule. Pasquantino held that the United States could apply the
wire fraud statute when the object of the crime was evasion of a foreign countrys taxes. Thus, it
is likely that, as the economy becomes increasingly global, jurisdictions such as the U.S. will find
it increasingly to their benefit to apply their laws to undergird revenue laws of other countries in the
hope and expectation that the other countries will reciprocate.
c.
By the United States to a Foreign Country.
Just as the U.S. procedures control letters rogatory requests by foreign countries to the U.S.,
so the respective foreign countrys procedures control U.S. letters rogatory requests to it. It would
not be helpful to attempt to summarize those procedures here since they vary from country to
country. Suffice it to say that they can be time-consuming and frequently inadequate because the
foreign countrys laws may prohibit the information or documents from being disclosed.1358
A U.S. taxpayer may, of course, attempt to intercede with the foreign country authority to
oppose a U.S. request to a foreign country for information. 18 U.S.C., 3506 requires that the U.S.
taxpayer must serve any such opposition (by pleading or other document) on the Attorney General
or the attorney for the Government. More seriously, under 18 U.S.C., 3292, the Government can
suspend the running of the statutes of limitations for up to three years by making an official request
to the foreign country for the information or documents, then filing an application with the district
court before indictment and proving by a preponderance of the evidence that such evidence is,
or was, in such foreign country.
4.
Other Means.
Other less formal means are available in the absence of an applicable treaty or letters
rogatory. A country may make a request in a format similar to the that used for MLATs (hence, this
type of request is often referred to an MLAT-type request). As a matter of comity (including
1358
Abramovsky & Edelstein, Time for Final Action on 18 U.S.C. 3292, 21 Mich. J.
Intl L. 941 (2000).
- 539 -
relations between the countries at the time), the requested country may respond to the extent
consistent with its domestic legislation.1359
5.
Reminder on the Governments Unilateral Statute of Limitations

Extension Gambit.
This is just a reminder of the point noted above1360 that the Government can extend
unilaterally the criminal statute of limitations by making a foreign evidence request under the
foregoing procedures if done incident to a grand jury investigation.
D.
Other Techniques.
When the information desired is not the subject of a treaty, the IRS must repair to other
techniques. We will see one such technique below in the Payner case,1361 involving the violation of
rights of a foreign custodian of records in order to produce information on a taxpayer whose rights
were not violated. Because of the violation of law, that type of investigative activity is probably not
encountered very often.
I therefore consider legal techniques in this section of the materials. And I develop the
analysis incrementally.
Lets assume the prototypical situation where the taxpayer has a Swiss bank account that,
somehow, the IRS has discovered. The IRS then serves a summons upon a New York branch of the
Swiss bank. Clearly the New York branch is within the U.S. summons power. Will the U.S. get the
information? This turns upon how much punishment (fines) the Swiss bank is willing to stand in
order to avoid giving up the information. Of course, the Swiss banks first line of defense will be
that it cannot give up the information because to do so would violate Swiss law. That defense
usually fails, based upon a balancing of interests test.1362 Note in this regard that the recent Balsys
case, although not dealing directly with this issue, indicates that U.S. legal imperatives are
sufficiently important to trump foreign law at least in the context of the constitutional Fifth
Amendment privilege, so that certainly the possibility of violating foreign law will not be a strong
imperative here. Assuming the court concludes in favor of the U.S., the court will enforce the
summons which, in the case of a corporate summonsee, means that, should it fail to honor the
summons, it will suffer monetary contempt penalties that can be great indeed.1363
1359
This discussion is summarized from Springer, supra, p. D-5.

1361
See discussion of Payner below beginning on p. 663.
1362
See, e.g., In re Grand Jury 81-2, 550 F. Supp. 24, 27 (W.D. Mich. 1982); but see
United States v. First Natl Bank, 699 F.2d 341, 342 (7th Cir. 1983).
1363
See In re Grand Jury Proceedings (United States v. Bank of Nova Scotia), 691 F.2d
1384 (11th Cir. 1982), cert. denied, 462 U.S. 1119 (1983); and the companion case In re Grand Jury
Proceedings (United States v. Bank of Nova Scotia), 740 F.2d 817, 832-33 (11th Cir. 1984), cert.
denied, 469 U.S. 1106 (1985) (upholding a contempt order and levying fines totaling $1,825,000).
1360
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This means, of course, that the smart evader will not use a foreign institution with sufficient
U.S. presence to suffer this risk. Where that happens, the IRS will resort to the court-ordered
consent directive ordering the U.S. taxpayer to sign a consent form directing the foreign institution
(bank, brokerage concern, etc.) to disclose information to the U.S. authorities.1364
A similar technique of leveraging domestic processes to force out information from a foreign
country is found in the compelled consent technique. Under that technique, a person within the
summons or subpoena power of the U.S. is compelled to sign a consent that, if honored by the
foreign person or entity, will authorize or even direct the foreign person or entity to disclose
information to the U.S. Government for tax purposes. I discuss that technique elsewhere.1365
E.
Civil Tax Considerations of Foreign Evidence.
These are criminal materials and therefore I do not deal with the various civil tax
considerations raised by foreign evidence. There are a number, however, and the criminal tax
practitioner who must ultimately keep his eye on the civil tax ball while juggling the criminal tax
balls will undoubtedly have to face them. For further discussions, I direct the reader to the two
articles cited at the beginning of these matters.
1364
1365
I discuss these consent directives below in the Doe case at p. 608.

See p. 608.
- 541 -
CH. 9 - MITIGATING THE DAMAGE

I.
Introduction.
A target of a criminal tax investigation will want to mitigate the damage. In this chapter, I
discuss the opportunities available to do that. I first discuss strategies to keep information from the
Government in order to prevent or minimize the Governments ability to investigate or prosecute
the taxpayer. I also discuss the opportunity to obtain some type of immunity from prosecution either
by what is known as voluntary disclosure or by some type of more formal immunity. I then discuss
opportunities to capitalize from the Governments mistakes in its investigation.
II.
Privileges Hiding the Ball.

A.
Introduction.
Privileges are an evidentiary concept. The general rule in Anglo-American jurisprudence

is that each person both citizens and artificial entities may be compelled to tell what he knows
to administrative agencies and courts in order to assist those agencies and courts administer the laws
and dispense justice. In pithy language, the Supreme Court has admonished that the public has the
right to everymans evidence.1366 Privileges, where applicable, permit persons to withhold what
they know or, in a broader sense, evidence and hence to hamper the truth finding process in which
courts and administrative agencies are involved. Privileges are thus justified only where there is
some overriding public benefit a public good transcending the normally predominant principle
of utilizing all rational means for ascertaining truth.1367
In the federal system, the recognized privileges are those that at common law subject to such
adjustments as Congress or, sometimes, the courts have made in light of reason and experience
to the common law privileges.1368
1366
Trammel v. United States, 445 U.S. 40, 50 (1980) (internal quotes and words omitted
for clarity), quoting United States v. Bryan, 339 U.S. 323, 331 (1950)).
1367
Trammel v. United States, 445 U.S. 40, 50 (1980) (internal quotes omitted, but
quoting Elkins v. United States, 364 U.S. 206, 234 (1960) (Frankfurter, J., dissenting)).
1368
Rule 501 of the Federal Rules of Evidence states:
Except as otherwise required by the Constitution of the United States or provided by
Act of Congress or in rules prescribed by the Supreme Court pursuant to statutory
authority, the privilege of a witness, person, government, State, or political
subdivision thereof shall be governed by the principles of the common law as they
may be interpreted by the courts of the United States in the light of reason and
experience.
The in light of reason and experience mandate is a quote from Wolfe v. United States, 291 U.S.
7, 12 (1934). Under this Rule, courts may develop the law the common law on a case by case
basis. See United States v. Cintolo, 818 F.3d 980, 1002 (1st Cir. 1987), citing United States v.
Gillock, 445 U.S. 360, 367 (1980); Trammel v. United States, 445 U.S. 40 (1980). Courts do not
- 542 -
B.
Privileges in the Federal Universe.
A witness obligations for an IRS summons (and other compulsory processes such as
subpoenas) are subject to the traditional privileges and limitations of any other compulsory
process.1369 The traditional privileges most commonly encountered in tax practice:
(1)
The attorney/client privilege;
(2)
A variant of the attorney/client applicable only in certain (but not all) tax contexts
- the federally authorized tax practitioner privilege;
(3)
Work product privilege;
(4)
Fifth Amendment privilege against self incrimination; and
(5)
Spousal Privileges.
There are other privileges that may apply in a tax setting and, of course, practitioners and
students should be aware of them. For example, there is a doctor / patient privilege. Other
privileges are not commonly encountered in tax practice, so I do not discuss them here.
C.
Fifth Amendment Privilege.
At several points in the tax filing through tax prosecution process, a taxpayer should consider
whether to invoke his Fifth Amendment Privilege. The Fifth Amendment may be encountered: (1)
in filing a tax return, the taxpayer may not want to respond to certain questions (e.g., his trade or
business) for fear it might expose nontax criminal activity (e.g., drug dealing); (2) after filing, a
taxpayer may face a similar dilemma in trying to decide whether to amend an original fraudulent or
false return; (3) during an IRS civil or criminal investigation, the taxpayer may be summonsed to
give testimony and/or produce documents that might be privileged; and (4) during the criminal trial,
the taxpayer may want to consider testifying. I noted earlier that the Government does not usually
subpoena a target of a grand jury investigation to appear and testify before a grand jury, but
obviously a target should seriously consider asserting his or her Fifth Amendment privilege if the
Government does do so.
view this as a license to create new privileges, but certainly they can embellish the privileges that
are there. See Trammel (embellishing the common law privilege), and United States v. Arthur
Young & Co., 465 U.S. 816 (1984) (refusing to create a new privilege)..
1369
Upjohn Co. v. United States, 449 U.S. 383, 398 (1981) (quoting United States v.
Euge, 444 U.S. 707, 714 (1980)); see also FRE Rule 501 (except as otherwise specifically provided,
privileges are governed by the principles of the common law as they may be interpreted by the
courts of the United States in the light of reason and experience).
- 543 -
1.
The Privilege.
The Fifth Amendment to the Constitution provides: No person shall * * * be compelled in

any criminal case to be a witness against himself * * * *.
Taxpayers may assert the Fifth Amendment privilege against compelled self-incrimination.
The privilege has been narrowed only to compulsory testimonial self-incrimination. Certainly, we
all recognize that a taxpayer cannot be forced to testify as to incriminating matters. Thus, in any
type of compulsory setting (e.g., a discovery or trial subpoena, a grand jury subpoena or an
administrative compulsory process such as an IRS summons, a taxpayer having a substantial fear
of incrimination from answering the questions posed can assert the Fifth Amendment.
The privilege is a discrete one, though. It only applies where the answer to the question
could possibly incriminate the witness. Even in an investigation with criminal overtones, all
possible questions do not require an answer that might incriminate the witness. Accordingly, the
witness is required to listen carefully to the question and make are reasonable determination as to
what information may be incriminating. And, if the person posing the question is unhappy with a
claim of the Fifth Amendment privilege to the question or questions asked, the person usually can
seek an order compelling the answer and obtain it unless the witness convinces the court that the
question is potentially incriminating. I discuss enforcement proceedings below. Suffice it to say
at this point, that particularly in IRS investigations where the investigation may be overtly criminal
in nature and even in civil investigations where criminal prosecution is possible, the privilege may
be asserted and, if courts are asked to rule on the propriety of the assertion of privilege, the courts
will give considerable leeway in the clients claim of assertion of the privilege but will require the
answer is the clients claim is clearly not proper. For this reason, of course, most assertions of the
privilege in such administrative settings are never contested by the IRS.
2.
The Return Filing Dilemma.

a.
Introduction.
Taxpayers face the Fifth Amendment issue at two key points in the tax process being
considered here. First, they face the issue of whether some disclosure required on the return might
be incriminating or might be a link in a chain that could lead to conviction for a non tax crime. For
example, a person may be a drug dealer and, while willing to pay his taxes, reluctant to disclose the
source of his income on Schedule C (which is the schedule reporting income, loss and net profit
from a trade or business operated as a sole proprietorship). Second, a person may already be under
investigation for a tax crime and be required to file a current year return that would, if accurate,
require information to be disclosed that could be a link in a chain to convict him for the earlier year
being investigated. For example, if the taxpayer reported no Schedule C income last year and is
being investigated for that failure, his reporting of $1,000,000 of Schedule C net income for the
current year would be a potentially damaging admission.
There are key cases that offer guidance in resolving this genre of dilemma.
- 544 -
In United States v. Sullivan,1370 the taxpayer had income from illicit traffic in liquor
(remember the prohibition era?). The taxpayer did not make a return and was convicted of willfully
failing to file a return. After holding that the income was subject to tax, the Court turned to the issue
of whether, given the illegal nature of the income, the taxpayer was required to report it on a return.
As the defendants income was taxed, the statute of course required a return.
* * * *. If the form of return provided called for answers that the defendant was
privileged from making he could have raised the objection in the return, but could
not on that account refuse to make any return at all. We are not called on to decide
what, if anything, he might have withheld. Most of the items warranted no
complaint. It would be an extreme if not an extravagant application of the Fifth
Amendment to say that it authorized a man to refuse to state the amount of his
income because it had been made in crime. But if the defendant desired to test that
or any other point he should have tested it in the return so that it could be passed
upon. He could not draw a conjurers circle around the whole matter by his own
declaration that to write any word upon the government blank would bring him into
danger of the law. * * * * *. In this case the defendant did not even make a
declaration, he simply abstained from making a return. * * * *.
It is urged that if a return were made the defendant would be entitled to
deduct illegal expenses such as bribery. This by no means follows, but it will be
time enough to consider the question when a taxpayer has the temerity to raise it.1371
In Garner v. United States,1372 the Government prosecuted a defendants federal crimes
related to fixing sporting events. The Government introduced the defendants tax returns to show
that he described himself thereon as a gambler and therefore that he was familiar with gambling.
The defendant urged that, since he had been under compulsion to file the returns (i.e., penalty of
criminal prosecution for failing to file), he should be able to assert the Fifth Amendment privilege
to prevent the Government from using the return as evidence against him.1373 The Court first held,
as in Sullivan, that, in filing the return, the defendant could have asserted the privilege as to specific
requests for information that he believe implicated his Fifth Amendment privilege. Further, the
Court reasoned, the information disclosed on the return is the testimony of a witness for purposes
of Fifth Amendment analysis. The Fifth Amendment must be affirmatively asserted.
1370
274 U.S. 259 (1927).

Id, pp. 263-264.
1372
424 U.S. 648 (1976).
1373
This is sort of like a claim for use immunity i.e., the taxpayer is legally compelled
to give the information and therefore it should not be used against him in criminal prosecution. I
discuss this aspect of the Fifth Amendment and immunity later.
1371
- 545 -
b.
Fifth Amendment Returns.
Since Sullivan and Garner teach that a return must be filed, the question arises whether the
taxpayer may file a return with no information other than a general claim of the Fifth Amendment
privilege? In United States v. Neff,1374 the taxpayer did that. The Court sustained prosecution,
reasoning:
By asserting his Fifth Amendment privilege at the time he filed the 1040
forms, Neff complied with the well-established rule that a self-incrimination
objection to an income tax return must be raised at the time of filing. Garner v.
United States, 424 U.S. 648, 665 & n.21(1976). After the jury was impaneled, and
just before opening statements were to begin, Neff moved for a pretrial ruling on the
validity of his Fifth Amendment claim. This motion was denied as untimely. Neff
complains that he never thereafter received a judicial ruling on the validity of his
asserted privilege. We disagree. An examination of the record shows that the
district judge repeatedly expressed his conviction that Neff had no valid
self-incrimination claim. In his instructions to the jury, the judge stated that Neffs
belief to the contrary was erroneous as a matter of law. Our responsibility on
review is to determine the propriety of that ruling.
The Supreme Court has stated that the privilege against self-incrimination,
if validly exercised, is an absolute defense to a section 7203 prosecution for failure
to file an income tax return. Garner v. United States, supra, 424 U.S. at 662-63. The
Court has also held, however, that the privilege does not justify an outright refusal
to file any income tax return at all. United States v. Sullivan, 274 U.S. 259, 263
(1927). Furthermore, an objection may properly be raised only in response to specific
questions asked in the return. Id. See Garner v. United States, 501 F.2d 228, 239
n.18 (9th Cir. 1974) (en banc), affd Garner v. United States, supra, 424 U.S. 648.
We are here faced with a case in which the taxpayer did assert his privilege
in response to specific questions in the tax return form, but did so on such a
wholesale basis as to deny the IRS any useful financial or tax information. Other
circuits, faced with similar wholesale assertions of the privilege against
self-incrimination, have concluded that a tax return form which contains no
information from which tax liability can be calculated does not constitute a tax return
within the meaning of the IRS laws. Once these courts determine that the taxpayer
has filed no return, simple application of the Sullivan precedent, which states that the
Fifth Amendment will never justify a complete failure to file a return, invalidates the
Fifth Amendment defense.
Although we recognize the ease with which the logic used in these cases
would resolve the issue before us, we conclude that such reliance upon the definition
of a tax return is inappropriate, because it lacks independent Fifth Amendment
1374
615 F.2d 1235 (9th Cir. 1980).
- 546 -
analysis. Moreover, the usefulness of this definitional approach is too limited

because it is confined to facts such as those presented here: the wholesale assertion,
albeit in response to specific questions, of the privilege against self-incrimination.
In settings in which the Fifth Amendment right has been more discretely asserted,
it would be difficult to conclude that no return has been filed, and, therefore,
inappropriate to apply this definitional analysis. We therefore choose not to follow
the lead of the cited cases. We believe that the better approach to this and future
Fifth Amendment tax return cases is to apply more traditional Fifth Amendment
analysis.
The requirement that citizens file a yearly income tax return does not, of
itself, violate their privilege against self-incrimination. This conclusion is implicit
in the Supreme Court ruling that taxpayers cannot rely upon the Fifth Amendment
to justify a complete failure to file. See Sullivan v. United States, supra, 274 U.S.
at 263. Other statutory reporting requirements have been found to violate the
privilege, but the reporting schemes in these cases were directed at a highly
selective group inherently suspect of criminal activities in an area permeated with
criminal statutes. Questions on income tax returns, in contrast, are neutral on their
face and directed at the public at large. Id. Therefore, in order for Neff to escape
prosecution under section 7203, there must be something peculiarly incriminating
about his circumstances that justifies his reliance on the Fifth Amendment. Before
examining that circumstance, we will set forth pertinent Fifth Amendment principles.
To claim the privilege validly a defendant must be faced with substantial
hazards of self incrimination, that are real and appreciable and not
merelyimaginary and unsubstantial. Marchetti v. United States, supra, 390 U.S. at
48, 88 S. Ct. at 702. Moreover, he must have reasonable cause to apprehend (such)
danger from a direct answer to questions posed to him. Hoffman v. United States,
341 U.S. 479, 486 (1951). The information that would be revealed by direct answer
need not be such as would itself support a criminal conviction, however, but must
simply furnish a link in the chain of evidence needed to prosecute the claimant for
a federal crime. Id. Indeed, it is enough if the responses would merely provide a
lead or clue to evidence having a tendency to incriminate. Id. at 348.
In determining whether such a real and appreciable danger of incrimination
exists, a trial judge must examine the implications of the question(s) in the setting
in which (they are) asked. Hoffman v. United States, supra. He must be governed
as much by his personal perception of the peculiarities of the case as by the facts
actually in evidence. Hoffman v. United States, supra, 341 U.S. at 487. If the trial
judge decides from this examination of the questions, their setting, and the
peculiarities of the case, that no threat of self-incrimination exists, it then becomes
incumbent upon the defendant to show that answers to (the questions) might
criminate him. This does not mean that the defendant must confess the crime he has
sought to conceal by asserting the privilege. The law does not require him to prove
- 547 -
guilt to avoid admitting it. Marchetti v. United States, supra, 390 U.S. at 50,
quoting United States v. Kahriger, 345 U.S. 22, 34 (1953) (Jackson, J., concurring).
But neither does the law permit the defendant to be the final arbiter of his own
assertions validity. The witness is not exonerated from answering merely because
he declares that in so doing he would incriminate himself his say-so does not of itself
establish the hazard of incrimination. It is for the court to decide whether his silence
is justified . . . . Hoffman v. United States, supra, 341 U.S. at 486. See also
Marchetti v. United States, supra, 390 U.S. at 50.
Thus, the defendant is placed in a delicate position, well described by Judge
Learned Hand:
Obviously a witness may not be compelled to do more than show that
the answer is likely to be dangerous to him, else he will be forced to disclose
those very facts which the privilege protects. Logically, indeed, he is boxed
in a paradox, for he must prove the criminatory character of what it is his
privilege to suppress just because it is criminatory. The only practicable
solution is to be content with the doors being set a little ajar, and while at
times this no doubt partially destroys the privilege, and at times it permits the
suppression of competent evidence, nothing better is available.
United States v. Weisman, supra, 111 F.2d at 262.
Applying these principles to the facts before us, we conclude that the trial
judge correctly decided that Neff had no valid Fifth Amendment defense to the
section 7203 prosecution. The questions asked of Neff on the income tax form did
not, of themselves, suggest that the response would be incriminating; nor did the
setting in which they were asked a general inquiry about Neffs financial and tax
status, to be completed in the privacy of his own home alter the non-incriminatory
nature of those questions. Moreover, the peculiarities of the case did not strengthen
Neffs claim. If anything, the tax protest nature of defense witness Holmes
testimony and of the materials that Neff appended to his returns suggest that Neffs
refusal to complete the forms was motivated by a desire to protest taxes, rather than
a fear of self-incrimination. In short, the whole circumstance was innocuous and
thus unprotected absent some positive disclosure by the witness of its hidden
dangers. Neff made no such disclosure. At no point during the trial, including
when Neff testified, was the district judge presented with any indicia of potential
incrimination. On the contrary, Neffs counsel argued that Neffs sincerity of belief
was sufficient to validate his assertion of the privilege, and that Neff alone should
be the final arbiter of the assertions validity. As we have seen, that is not the law.
Neff did not show that his response to the tax form questions would have been
self-incriminating. He cannot, therefore, prevail on his Fifth Amendment claim.
- 548 -
c.
Selective Assertion on Returns.
From the above, we derive the conclusion that generally, the proper way to assert the Fifth
Amendment on current returns is to selectively assert it on the return in response to the line item
requesting information that may be incriminating. Certainly line items on the return that require
disclosure of a source of income or a type of business (as in Schedule C) might permit the assertion
of the Fifth Amendment to avoid answering the question. What about the amount of the income?
Any lawyer worth his or her pay can provide reasons, often tenuous, as to why putting the amount
of income would be incriminating even if the Fifth Amendment is asserted as to the source. But the
amount of income is usually not thought of as the quality of information that is incriminating for
Fifth Amendment purposes.1375
d.
Filing No Return.
(1)
General.
Do Sullivan and Garner really mean that a return must be filed in all cases? As Neff
suggests, there is a limited class of cases, the fountainhead of which are the companion Supreme
Court cases of Marchetti v. United States,1376 and Grosso v. United States.1377 Those cases hold that,
if, as in the wagering returns involved there, the filing obligation is imposed on a class of persons
inherently suspect of criminal activities the taxpayer may have a valid Fifth Amendment claim
that may be exercised by not filing, which means that the taxpayer cannot be prosecuted for
exercising his right. The problem in that case was the very real risk that the IRS would share the
return information with state and local agencies who could use the mere fact of filing to incriminate.
Congress has since amended the law to prohibit the IRS from disclosing to state and local authorities
this type of information, so that the risk of incrimination has, presumably, been eliminated.
The constitutional concern in Marchetti and Grosso does not apply to the types of returns
normally filed with the IRS, for they are not targeted at a group inherently suspect of criminal
activities. Certainly, income tax return and estate and gift tax returns do not suffer that infirmity,
and most excise tax returns also do not. Accordingly, the holdings in Marchetti and Grosso while
still important to inform Congress as to the limitations on its power, are of limited direct
applicability to the practitioner. The practitioner today must be far more concerned about how to
make a proper assertion of the Fifth Amendment on a return he or she actually files.
1375
E.g., United States v. Goetz, 746 F.2d 705, 710 (11th Cir. 1984); United States v.
Brown, 600 F.2d 248, 252 (10th Cir. 1979), cert. denied, 444 U.S. 917 (1979); United States v.
Johnson, 577 F.2d 1304, 1311 (5th Cir. 1978).
1376
390 U.S. 39 (1968).
1377
390 U.S. 62 (1968).
- 549 -
(2)
Current Year
Investigation.
Returns
During
Criminal
There is still some thought that, in appropriate cases (very limited) where the filing of a
current return would be incriminating because the required disclosures would be incriminating in
a then pending criminal investigation, the taxpayer might delay filing the return and remit to the
IRS an amount large enough to cover the tax liability, plus penalties for failure to file and any other
penalties that might apply. 1378 What should be the risks to the taxpayer and/or the lawyer advising
this type of nonfiling strategy?
The more traditional view, however, is that a current criminal investigation does not permit
the Fifth Amendment failure to file. Consider the following in the context of a foreign bank account
after omitting the income and answering the question untruthfully in prior year returns.
Tax advisers have limited options to offer taxpayers on how to file a
complete and accurate return without incriminating themselves. One approach is to
advise the taxpayer to i) report all income generated from his business, ii) report all
interest and dividend income generated by the account, but invoke the Fifth
Amendment privilege as to the source of this income, and iii) assert the privilege as
a basis for failing to answer the question on the 1040, Schedule B, of whether the
taxpayer has signatory authority over a foreign bank account.1379 But each case is
different, and even experienced practitioners differ on how to file returns in this
context.
The act of filing a return for a taxpayer under criminal investigation is fraught
with peril. The practitioner must advise the taxpayer to comply with current filing
requirements, even if the taxpayer believes that doing so is not in his or her interest.
A practitioner can advise the taxpayer to use the Fifth Amendment privilege where
appropriate, but should not - indeed may not - counsel the client not to file, or to file
on inaccurate or incomplete return.
If a taxpayer upon proper advice of counsel decides to pursue the nonfiling
strategy, how should he proceed? First, the taxpayer should calculate the amount
1378
See Caplin & Drysdale, Criminal Tax Investigations and Current-Year Returns: New
Thoughts on a Perennial Issue, Mondaq Business Briefing (1/25/05); Practitioners Debate Tax
Return Strategies for Clients under Investigation, 98 TNT 220-2 (11/16/98).
1379
n69 Ownership over the foreign bank account triggers a separate reporting
requirement - the filing of Treasury Department Form 90-22.1. No court has specifically addressed
whether the taxpayer can simply decline to file Form 90-22.1 on the basis of the Fifth Amendment
privilege. However, based on the decisions involving other tax forms it would appear that the
privilege is not a defense for simply failing to file. Rather, the taxpayer can file the form in such a
way that it cannot be used against him, such as by claiming that the Fifth Amendment shields him
from having to file the form.
- 550 -
of the tax liabilities, resolving uncertainties in the favor of the IRS and pay that
amount to the IRS for application against the current years tax liability. Second,
the taxpayers lawyer should send a cover letter with the payment identifying the
client and stating precisely what the taxpayer is doing, with a copy going to the
Special Agent in charge of the criminal investigation.1380
As noted, in order to err on the side of caution, the calculated tax payment may well exceed
the taxpayers actual liability for the year. The excess can be claimed on the deferred return when
it is safe to file it. The practitioner should, however, pay close attention to the civil statutes of
limitations that apply to refunds and will want particularly to take some defensive measures if the
criminal problem has not been resolved before the statute of limitations would expire on the refund.
A recent publication cautions that recent prosecutions suggest the Government is not happy
with taxpayers assertions of the right to file no return or the right to file a return with disclosures
that claim expansive scope of a Fifth Amendment claim to withhold information.1381 The authors
conclude that the better part of wisdom is to always file a return while the investigation is underway
and consider selective and narrowly focused assertions of the Fifth Amendment to specific items on
the return rather than some broad claims via a disclosure statement. Taxpayers and practitioners
therefore should be cautious in this area.
In United States v. Sabino, 274 F.3d 1053 (6th Cir. 2001), Sabino had been interviewed by
the Special Agent and read his modified Miranda warnings. Sabino thereafter failed to file tax
returns that became due after he knew he was being investigated for federal tax crimes. Sabino
alleged that an attorney had advised him not to file income tax returns because doing so would
constitute the making of self-incriminating statements. Thereafter, Sabinos indictment alleged
those subsequent failures to file as overt acts and, at trial, the failure was introduced as evidence of
willfulness. The Court held that these uses of Sabinos failure to file returns to meet current and
ongoing filing requirements during the criminal investigation and prosecution did not violate his
Fifth Amendment privilege, noting the authority above that the taxpayer must assert his Fifth
Amendment privilege to the specific requests for information on the return rather than refusing to
file a return at all.
Sabinos failure to file returns after he became aware of the criminal investigation could have
led to more serious results. Under the same reasoning, he could have been prosecuted for those
subsequent failures to file, rather than just using those failures to file as evidence of earlier criminal
conduct.
What about Sabinos claim that an attorney had advised him that he could assert the Fifth
Amendment privilege by failing to file a return? Although the law as developed generally precludes
the use of failure to file as a means to assert the Fifth Amendment privilege, Sabino may not have
1380
See Cono Namorato and Scott Michel, International Criminal Tax Cases, U. Miami
L. Rev. 617 (1996).
1381
Caplin & Drysdale, Criminal Tax Investigations and Current-Year Returns: New
Thoughts on a Perennial Issue, Mondaq Business Briefing (1/25/05)
- 551 -
known the nuances of the law, and he allegedly did rely upon the advice of an attorney in not filing
the subsequent returns. If he had been prosecuted for those failures to file, he surely could have
asserted the advice of counsel as a basis for defending against the key element of willfulness. If a
jury believed that he did rely upon advice of counsel in asserting the Fifth Amendment privilege by
not filing the returns, the jury could not find the requisite willfulness to convict for failures to file.
Why would not that be a defense that could be asserted in the circumstances of Sabino where the
failures to file in the subsequent years was used to infer willfulness for the prior years for which the
indictment was brought? The Sabino court does not explain, but its statement that Sabino
allegedly was advised by an attorney indicates perhaps that it disbelieved the allegation.
e.
The Attorneys Role in Client Choices.
Finally, the attorney representing the target of a criminal investigation or prosecution will
likely be consulted to advise the taxpayer in making choices as to whether and how to report on the
current year return. The attorney must provide the taxpayer advice that is legally and ethically
appropriate under the foregoing general guidelines. In providing the advice, the attorney must be
cognizant at all times that his own conduct could be the subject of scrutiny and that, as I note below,
the attorney-client privilege may not exist for the advice or, if it exists, may be waived by the client
in return for a deal.
3.
Voluntary Disclosure.
a.
Introduction to the Concept of Voluntary Disclosure.
The Government has a voluntary disclosure program1382 that permits a taxpayer to avoid the
criminal prosecution risk for tax noncompliance. In general terms, the program gives some
assurance against criminal prosecution to a taxpayer who voluntarily reports his or her wrongdoing
before coming into the criminal cross-hairs of the IRS. The IRS and DOJ have each had some form
of voluntary disclosure program for a long time. The nuances of the programs may change from
time to time, but the broad outlines have been relatively stable.
The general parameters of the program in its various iterations over the years is: where the
taxpayer who has committed or has possibly1383 committed a tax crime related to a filed return or a
failure to file and the IRS has not yet commenced a criminal investigation or, possibly even a civil
1382
These are variously worded as programs, policies and practices. I will try to use the
word program simply to avoid confusion. Sometimes that is not possible, because the principal
program administered by the IRS is called a practice by the IRS. I also use the word program in
the singular, although (as will be noted), both the IRS and DOJ Tax CES have separate but related
programs, practices or policies and, even within the IRS, there are several iterations of the practice.
1383
Sometimes it is not clear. Even where the taxpayer does not think he has committed
a crime which, after all, does require his or her intent to commit, other people specifically, the IRS,
the DOJ, and a judge or jury might think he committed the crime.
- 552 -
tax audit,1384 the taxpayer may be able to cure the criminal prosecution risk by making a voluntary
disclosure.1385 When a disclosure qualifies under the policy, the IRS exercises its discretion not to
refer the case to DOJ Tax CES for further investigation or prosecution. The taxpayer is protected
only from criminal problems; he or she is not insulated from civil taxes, penalties and interest.1386
The policy thus operates as a form of administrative amnesty. If for some reason, DOJ Tax CES
were to consider prosecuting a taxpayer who made a voluntary disclosure, it will consider the
voluntary disclosure and compliance with the IRS program as a significant factor weighing against
prosecution. (I discuss this in more detail below.)
The voluntary disclosure program reflects practical and fiscal imperatives. The practical
imperative is that, in tax cases, a jury will often be less likely to convict where the taxpayer has
corrected the criminal conduct by voluntarily filing an amended return or delinquent original return.
The fiscal imperative -- probably more important to the existence of the program -- is that it is
win-win as a revenue measure. A voluntary disclosure policy will generate significant additional
revenue for the Government since the IRS would not have discovered or, if discovered, would not
have prosecuted most of the taxpayers who voluntarily disclose under the policy. There are still
plenty of taxpayers to prosecute who have not gotten right with the Government for the Government
to meet its criminal tax enforcement needs, so the additional revenue generated by the voluntary
disclosure policy is a freebie for the Government. The Government gives up nothing of systemic
importance and gets a material amount of revenue that, but for the policy, it would never get.
The key caveat here is that the disclosure must be voluntary and must be complete. In order
to avoid fact intensive queries about what precisely is motivating the taxpayer to make a disclosure,
the IRS has some rules that disqualify the taxpayer based on the timeliness of the disclosure. The
1384
As will be noted, the current IRS policy treats as untimely a voluntary disclosure
attempted after a civil audit of the taxpayer and, in some cases, related parties has commenced. That
has not always been the case; and, I suspect, may be honored in the breach even now through
general understandings in the process of a voluntary disclosure.
1385
Both the IRS and the DOJ have voluntary disclosure practices or policies. I discuss
them in detail later in the text. Some states have from time to time adopted voluntary disclosure
practices or policies. Here, we deal only with federal voluntary disclosure to wit, the IRS and DOJ
practices or policies.
1386
An exception to this might be if, incident to the voluntary disclosure, the taxpayer
files amended returns that qualify as Qualified Amended Returns (QARs). Regs. 1.6664-2(c)(2).
QARs avoid the accuracy related penalty (generally 20%). The QAR does not apply if the return
was fraudulent, in which case the civil fraud penalty would apply to the portion of of the
understatement attributable to fraud and the accuracy related penalty could apply to some or all of
the portion of the understatement not attributable to fraud. However, making a voluntary disclosure
is not per se an admission of fraud. The taxpayer will have to disclose the facts that may be an
admission of fraud. But often in voluntary disclosures, the facts are still mixed as to fraud and the
taxpayer may be seeking just to avoid a misfocused criminal investigation and prosecution. In that
type of case, the taxpayer will want to act consistently with qualifying for the QAR relief.
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key timeliness condition is that a disclosure after a civil or criminal investigation has started is not
timely.
The foregoing are the general rules of the voluntary disclosure policy. It is more detailed,
and the nuances with respect to the policy shift from time to time. Still, a taxpayer having a
potential criminal problem on the original return or having failed to file a return should consider
voluntary disclosure, even if the circumstances might suggest that the disclosure is not really
voluntary (e.g., even if the spouse waging a nasty divorce has threatened to turn him in).
Within these broad parameters, there are actually two voluntary disclosure programs. The
IRS has one,1387 and DOJ Tax CES, which prosecutes all tax crimes, has one.1388 The two
substantially overlap, but from time to time there may be differences.1389 The important point,
however, is that if you fail to qualify for the IRS's policy and the IRS forwards the case to DOJ Tax
CES with a recommendation for criminal prosecution, the taxpayer may have another bite at this
apple.
b.
IRS Voluntary Disclosure Policy.

(1)
The Practice.
The IRM incorporates a voluntary disclosure practice (in the past often referred to as a
policy)1390 which provides, in relevant part (as last reviewed or updated on 10/6/11):
9.5.11.9 Voluntary Disclosure Practice
(1) It is currently the practice of the IRS that a voluntary disclosure will be
considered along with all other factors in the investigation in determining whether
criminal prosecution will be recommended. This voluntary disclosure practice
creates no substantive or procedural rights for taxpayers, but rather is a matter of
internal IRS practice, provided solely for guidance to IRS personnel. Taxpayers
cannot rely on the fact that other similarly situated taxpayers may not have been
recommended for criminal prosecution.
1387
The current IRS policy, referred to as a practice, is reflected in IRM 9.5.11.9
(6/26/09).
1388
The DOJ Taxs voluntary disclosure policy is reflected in its Criminal Tax Manual,
often referred to as the CTM, available on the DOJ web site, at 4.01 Voluntary Disclosure.
1389
That there may be differences is reflected in DOJ Tax Memorandum from the Acting
Assistant Attorney General which is reproduced in the CTM at 3.00.
1390
In an earlier IRM provision, the word policy was used in the heading, although the
word practice was used in the body. I am not sure that there would be a meaningful difference
between the word practice and policy in this context. Without engaging in too much semantics, I
do think the practice is an IRS policy.
- 554 -
(2) A voluntary disclosure will not automatically guarantee immunity from

prosecution; however, a voluntary disclosure may result in prosecution not being
recommended. This practice does not apply to taxpayers with illegal source income.
(3) A voluntary disclosure occurs when the communication is truthful, timely,
complete, and when:
a. the taxpayer shows a willingness to cooperate (and does in fact
cooperate) with the IRS in determining his or her correct tax liability; and
b. the taxpayer makes good faith arrangements with the IRS to pay in full,
the tax, interest, and any penalties determined by the IRS to be applicable.
(4) A disclosure is timely if it is received before:
a. the IRS has initiated a civil examination or criminal investigation of the
taxpayer, or has notified the taxpayer that it intends to commence such an
examination or investigation;
b. the IRS has received information from a third party (e.g., informant, other
governmental agency, or the media) alerting the IRS to the specific
taxpayers noncompliance;
c. the IRS has initiated a civil examination or criminal investigation which
is directly related to the specific liability of the taxpayer; or
d. the IRS has acquired information directly related to the specific liability
of the taxpayer from a criminal enforcement action (e.g., search warrant,
grand jury subpoena).
(5) Any taxpayer who contacts the IRS in person or through a representative
regarding voluntary disclosure will be directed to Criminal Investigation for
evaluation of the disclosure. Special agents are encouraged to consult Area Counsel,
Criminal Tax on voluntary disclosure issues.
(6) Examples of voluntary disclosures include:
a. a letter from an attorney which encloses amended returns from a client
which are complete and accurate (reporting legal source income omitted from
the original returns), which offers to pay the tax, interest, and any penalties
determined by the IRS to be applicable in full and which meets the timeliness
standard set forth above. This is a voluntary disclosure because all elements
of (3), above are met.
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b. a disclosure made by a taxpayer of omitted income facilitated through a

barter exchange after the IRS has announced that it has begun a civil
compliance project targeting barter exchanges; however the IRS has not yet
commenced an examination or investigation of the taxpayer or notified the
taxpayer of its intention to do so. In addition, the taxpayer files complete and
accurate amended returns and makes arrangements with the IRS to pay in
full, the tax, interest, and any penalties determined by the IRS to be
applicable. This is a voluntary disclosure because the civil compliance
project involving barter exchanges does not yet directly relate to the specific
liability of the taxpayer and because all other elements of (3), above are met
c. a disclosure made by a taxpayer of omitted income facilitated through a
widely promoted scheme regarding which the IRS has begun a civil
compliance project and already obtained information which might lead to an
examination of the taxpayer; however, the IRS has not yet commenced an
examination or investigation of the taxpayer or notified the taxpayer of its
intent to do so. In addition, the taxpayer files complete and accurate returns
and makes arrangements with the IRS to pay in full, the tax, interest, and any
penalties determined by the IRS to be applicable. This is a voluntary
disclosure because the civil compliance project involving the scheme does
not yet directly relate to the specific liability of the taxpayer and because all
other elements of (3), above are met.
d. a disclosure made by an individual who has not filed tax returns after the
individual has received a notice stating that the IRS has no record of
receiving a return for a particular year and inquiring into whether the
taxpayer filed a return for that year. The individual files complete and
accurate returns and makes arrangements with the IRS to pay the tax,
interest, and any penalties determined by the IRS to be applicable in full.
This is a voluntary disclosure because the IRS has not yet commenced an
examination or investigation of the taxpayer or notified the taxpayer of its
intent to do so and because all other elements of (3), above, are met.
(7) Examples of what are not voluntary disclosures include:
a. a letter from an attorney stating his or her client, who wishes to remain
anonymous, wants to resolve his or her tax liability. This is not a voluntary
disclosure until the identity of the taxpayer is disclosed and all other elements
of (3) above have been met.
b. a disclosure made by a taxpayer who is under grand jury investigation.
This is not a voluntary disclosure because the taxpayer is already under
criminal investigation. The conclusion would be the same whether or not the
taxpayer knew of the grand jury investigation.
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c. a disclosure made by a taxpayer, who is not currently under examination

or investigation, of omitted gross receipts from a partnership, but whose
partner is already under investigation for omitted income skimmed from the
partnership. This is not a voluntary disclosure because the IRS has already
initiated an investigation which is directly related to the specific liability of
this taxpayer. The conclusion would be the same whether or not the taxpayer
knew of the ongoing investigation.
d. a disclosure made by a taxpayer, who is not currently under examination
or investigation, of omitted constructive dividends received from a
corporation which is currently under examination. This is not a voluntary
disclosure because the IRS has already initiated an examination which is
directly related to the specific liability of this taxpayer. The conclusion
would be the same whether or not the taxpayer knew of the ongoing
examination.
e. a disclosure made by a taxpayer after an employee has contacted the IRS
regarding the taxpayer's double set of books. This is not a voluntary
disclosure even if no examination or investigation has yet commenced
because the IRS has already been informed by the third party of the specific
taxpayer's noncompliance. The conclusion would be the same whether or not
the taxpayer knew of the informant's contact with the IRS.
I have incorporated the IRM in major part because it is so important. This is virtually daily
grist of the tax crimes practitioners mill. Readers will note in the heading that I state the latest
revision date 10/6/11 which should tell you that the practice does and can change. The
changes are often in nuance only. But students and practitioners should consult the IRM early and
often. And, you need to understand that the wording of the policy is fraught with words of art that
are not explained, except perhaps by inference to the experienced practitioner. In other words, the
direct audience for the IRM is the IRS who, presumably, will know the terms of art (or have access
to interpreters for the nuances). Practitioners need some experience or interpreters to understand
the terms of art. I introduce below some of the major issues, but caution or access to interpreters
is critical.
(2)
How Is Disclosure Made?

(a)
The Quiet Disclosure.
Prior to the recent foreign financial account brouhaha and the special voluntary disclosure
programs for foreign financial account noncompliance, the method most commonly used for
implementing a voluntary disclosure was to file the amended return(s) or delinquent original
return(s) by mailing them to the Service Center. If possible, the taxpayer will include with the
amended return(s) or delinquent original return(s) a check or checks for the taxes and interest. The
- 557 -
amended return may have some explanation of the reason for the amendment in the hope that the
IRS will not assert a civil penalty or will assert a lesser civil penalty; some may also include a
reference to voluntary disclosure either in a cover letter or somewhere in the attachments to the
amended return. Care should be taken, however, that in attempting to avoid or lessen a penalty, the
taxpayer not make erroneous or misleading statements as to the reason for the earlier erroneous
return. If multiple years are involved, some practitioners believe it better to mail them separately
rather than in a single mailing. This form of disclosure is referred to as a quiet voluntary
disclosure. This type of quiet disclosure does not result in the IRS giving any affirmative assurance
of qualification for the voluntary disclosure policy.
One of the nice side benefits of the quiet disclosure is that the amended returns historically
have not been audited or have been audited only infrequently.1391 Indeed, there is a qualified
amended return process that says, in effect, that the amended return filed before an audit is started
will draw no penalty except in the case of fraud (in which case, of course, the civil fraud penalty
would apply).1392 In other words, unless the amended return(s) is audited and a finding of fraud
made, the taxpayers cost of his type of disclosure is the tax and the interest on the tax. Penalties
are not assessed. Given the audit capabilities of the IRS and the difficulties the IRS often encounters
in asserting and prevailing in the assertion of civil fraud, most amended returns will get through
without any penalties.
(b)
Noisy Disclosures.
In more sensitive cases (for example, where an unusually large amount of additional tax is
due), the taxpayer is concerned about some disqualifying event, or the taxpayer wants some
affirmative assurance from the IRS), the taxpayer's counsel may first have a meeting with CI -- IRS's
Criminal Investigation division -- to advise of the facts on an anonymous basis and, hopefully, to
receive advance assurance from CI that if the facts are as represented, CI will not pursue a criminal
investigation or recommendation to DOJ Tax CES for prosecution. This is often called a noisy
or negotiated walk-through voluntary disclosure. Taxpayers counsel will want to make sure to
address the sensitive issues which cautioned against merely filing the return(s). For example, if the
taxpayer is concerned about some event that might disqualify the taxpayer, taxpayers counsel can
address that issue in the anonymous stage of the presentation and, if the IRS deems it to be
disqualifying, will know that before the taxpayers identity is disclosed. Of course, the taxpayer and
his counsel may not know that a civil or criminal investigation has been instituted, so this is a risk
that cannot be eliminated. These negotiations are somewhat like plea bargaining, except that the
identity of the taxpayer is not known, the IRS has no power to plea bargain in the formal meaning
of the term, and the goal is to avoid criminal prosecution altogether via an IRS assurance that it will
not refer the case to DOJ Tax. Although the IRS has no power to plea bargain, the practical reality
1391
I dont recall any quiet disclosure resulting in an audit. Prior to the implementation
of the qualified amended return procedure (discussed below in the text), it was not uncommon for
certain penalties to be applied at the Service Center without an investigation, but I have not observed
that recently.
1392
Regs. 1.6664-2(c)(2).
- 558 -
is that it can prevent prosecution simply by agreeing in advance not to pursue the matter criminally
or refer the matter to the DOJ Tax for prosecution.
Some IRS CI offices are generally requiring a slightly different process more recently. They
will first ask the practitioner to disclose the name and identifying information for the taxpayer
without any disclosure of the underlying facts. The IRS will check its databases to see if the
taxpayer is under audit or criminal investigation or there is some other indication that the taxpayer
does not qualify to make a voluntary disclosure. Only thereafter will the taxpayer submit the
underlying information and will do so in writing.
(3)
Which Type of Disclosure is Better?
Assessing which of the types of disclosure the taxpayer should pursue requires judgment
seasoned with experience. Here are some of the issues that one should consider:
The noisy disclosure offers the possibility of giving the taxpayer some assurance that
the disclosure works and the criminal exposure is closed out with certainty. The
taxpayers attorney communicates directly with IRS personnel about the specific
issues and problems. The IRS directly communicates acceptance of the disclosure
with taxpayers counsel. By contrast, the taxpayer receives no such assurance that
quiet disclosure will be honored as a voluntary disclosure, so the taxpayer will go
forward for some period into the future with some level of uncertainty. Even with
this uncertainty which I think is minimal, my and most practitioners preferred
method of disclosure is the quiet disclosure. But, as noted, for special voluntary
disclosure circumstances, like the recent special offshore account initiative, noisy
disclosure may be required or, at least, preferred.
The noisy disclosure is more expensive than the quiet disclosure. Both will require
the preparation of amended returns, so that cost is fixed for both types of disclosure.
But, if you know in advance that the returns will be looked at closely, you may want
to spend more time to make sure that they are right and presented in the best light
possible. Noisy disclosure requires very careful preparation of the initial overture
to CI and thereafter careful and intricate dancing with CI in order to obtain the
assurance of non-prosecution (or, more precisely, non-referral to DOJ Tax).
Lawyers are expensive, and the process may be quite a bit more costly than the quiet
disclosure method. (Heaven forbid that some attorneys might think it preferable for
that reason.) And, given the only marginal benefit (absolute assurance directly from
CI rather than reasonable assurance from the practitioner), the extra layer of
lawyering and costs may not be cost effective for the client (as opposed to the
lawyer), but that is a client choice.
Lawyers have been concerned that the noisy disclosure will almost certainly result
in the 75% civil fraud penalty for one or more of the years involved (with potentially
lower penalties under a special initiative). As noted, the quiet disclosure may result
in no penalty either because the IRS does nothing or the QAR relief applies. This
tilts the cost / benefit ratio substantially in favor of quiet disclosure, although even
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this may be overstated,1393 but again the client wanting certainty may accept the
additional cost for the additional benefit. And, even where there is a noisy
disclosure, a taxpayer may be able to argue for QAR relief if the facts are murky as
to fraud.
c.
DOJ Tax Disclosure Policy.
Historically, DOJ Tax has had a voluntary disclosure policy that varied at least in some of
its nuances from the IRS voluntary disclosure policy. At present, the DOJ Tax policy is (emphasis
supplied):
4.01[1] Policy Respecting Voluntary Disclosure
Whenever a person voluntarily discloses that he or she committed a crime
before any investigation of the persons conduct begins, that factor is considered by
the Tax Division along with all other factors in the case in determining whether to
pursue criminal prosecution. See generally USAM, 9-27.220, et. seq.
If a putative criminal defendant has complied in all respects with all of
the requirements of the Internal Revenue Services voluntary disclosure
practice, the Tax Division may consider that factor in its exercise of
prosecutorial discretion. It will consider, inter alia, the timeliness of the voluntary
disclosure, what prompted the person to make the disclosure, and whether the person
fully and truthfully cooperated with the government by paying past tax liabilities,
complying with subsequent tax obligations, and assisting in the prosecution of other
persons involved in the crime.1394
Practitioners view this as bringing the DOJ Tax voluntary disclosure practice substantially in line
with the IRS voluntary disclosure practice. But, the wording does suggest that DOJ Tax might
prosecute even if the taxpayer has made a voluntary disclosure that the IRS would view as consistent
with its practice which in turn the IRS views as consistent with its mission to enforce and
administer the tax laws. This raises the issue of whether DOJ Tax would or could prosecute when
the IRS says that prosecution is not consistent with its administration of the tax laws. That is a big
and potentially distractive issue, so I forego it now (except in the footnote).1395
1393
The fear of the automatic assertion of the 75% civil fraud penalty after a noisy
disclosure may be exaggerated because of lack of cooperation between CI and the civil audit
function, but I have heard IRS personnel claim that they are getting better at this.
1394
DOJ Tax CTM (2008).
1395
If the IRS views the taxpayers disclosure as meeting its voluntary disclosure
practice, the IRS simply does not refer the taxpayer to DOJ Tax for criminal prosecution, and that
is the end of the matter. However, lets say that DOJ Tax or some other DOJ Tax component
focuses on the taxpayer for some reason other than a criminal prosecution or grand jury investigation
referral from the IRS; the issue raised is whether DOJ Tax can then authorize a prosecution that the
- 560 -
d.
Does the Voluntary Disclosure Practice Confer Rights?
Both the IRM and the CTM specifically state that the practice or policy confers no rights on
taxpayers. What does this mean? Basically, it means that the IRS will not be second-guessed in its
application of the practice by a court.1396 In other words, its serves to caution taxpayers that the
Caceres doctrine1397 applies to the voluntary disclosure practice, which might have been required by
Caceres even without the specific statement. So, you might ask, why should a taxpayer do a
voluntary disclosure if he or she has no assurance that he or she will not be criminally prosecuted?
The answer to that is that the IRS is not stupid, so it does a pretty good job of policing its application
of the practice. The voluntary disclosure practice is win-win for the IRS. If it were to prosecute one
or more taxpayers who actually or were perceived to have met the conditions for voluntary
disclosure, it would cost the IRS far more that it could ever hope to gain, because voluntary
disclosures would dry up.
Of course, there are cases where taxpayers have asserted that they met the conditions for
prosecution and that, therefore, the Government should not be able to prosecute them. What you
will find when you scratch the surface of those cases is that the taxpayers involved did not meet the
conditions for voluntary disclosure and otherwise behaved in a manner inconsistent with the
requirement that to cooperate completely.1398 This is to reinforce the applicability of the Caceres
doctrine. Consider the next case.1399
IRS insists is inconsistent with its responsibilities because the taxpayer complied with the voluntary
disclosure policy and therefore declines to refer to DOJ Tax? There are some big issues here. I
would like to go farther with this issue, but I dont want to turn this footnote into a book or at least
a law review article. Practitioners should be aware that, in the special IRS voluntary disclosure
initiative for foreign accounts, the IRS acceptance letters into the program specifically caveated that
the IRSs acceptance does not assure nonprosecution, apparently hedging the possibility that DOJ
Tax might independently determine to prosecute.
1396
See e.g., E.g., Crystal v. United States, 172 F.3d 1141, 1151 (9th Cir. 1999); United
States v. Knottnerus, 139 F.3d 558, 560, 561 n.5 (7th Cir. 1998) cert. denied, 119 S. Ct. 146 (1998).
1397
United States v. Caceres, 440 U.S. 741 (1979) (holding that IRM does not confer
rights on taxpayers; hence, evidence obtained arguably in violation of IRM cannot be excluded).
1398
Tenzer is the poster-child for this genre of case.
1399
A good example is United States v. Tenzer, 213 F.3d 34 (2d Cir. 2000), which I used
to include in the text of this book just so that the reader will get an idea for just the quintessential
type of taxpayer that asserts the benefits of voluntary disclosure no prosecution while not even
coming close to meet the conditions of the voluntary disclosure practice. Read it if you are
interested, but suffice it to say that, so long as your client meet the conditions of the practice, the
chances of his meeting Mr. Tenzers fate are slim and nonexistent.
- 561 -
e.
Timeliness, Truthfulness and Completeness.
Voluntary disclosure requires timeliness, truthfulness and completeness. When using quiet
disclosure, the return will usually not include a complete exposition of the underlying facts either
as to the nature of the erroneously reported item or the reason it was not included on the original
return. Nevertheless, what the amended or delinquent original return should report is all of the
information called for by the return instructions, although I think it need not include a detailed mea
culpa. And, the IRS would prefer a cover letter indicating that the quiet disclosure is intended to
qualify as a voluntary disclosure under the practice discussed above, but I think most practitioners
do not view that as necessary or appropriate, at least in some cases. I am not aware of such a quiet
disclosure ever failing (even without a cover letter as described), so long as the amended return or
delinquent original return contains the type of information normally required for returns in the type
of detail normally required. Of course, if the IRS wants then to ask the taxpayer questions about
the amended return or the delinquent original return, the taxpayers responses will have to be
complete and the taxpayer will have to be cooperative. Practitioners concerned about whether the
quiet disclosure is adequate without a complete discussion of the facts can simply include that
discussion.
For many reasons, the taxpayer will often be unable to file a completely accurate amended
return or delinquent original return. The taxpayer may not have kept good records, the taxpayer in
furtherance of the original fraud may have destroyed records, the time elapsed may have made some
third party sources of relevant information unavailable, etc. Yet, something needs to be done and
it needs to be done as accurately as possible, so that the taxpayer does not file a false amended return
or false delinquent return, thereby compounding his or her problem.1400 Good return preparers will
know how to undertake the type of due diligence to make the best return reasonably possible, and
that should be acceptable. But, obviously a good faith, even if expensive, effort must be made to
reconstruct the taxpayers income, deductions and credits and proper disclosures should be made
on the return where estimates and indirect methods of reconstruction are used. In many cases, this
will require the return preparer to make judgment calls against the taxpayer in order to insure that
the tax liability is not under reported. That is just a cost of the original fraud and insuring that the
IRS will bless the voluntary disclosure, a less likely result if the taxpayers disclosure by amended
return is found wanting. Good faith is the key, and good faith will work to insure the application
of the policy so long as the other requirements are met.
f.
Taxpayer Cooperation.
The taxpayer is required to be forthcoming and cooperative. Certainly, as to IRS inquiries

regarding the taxes or potential penalties, the taxpayer must cooperate. Does it mean more?
For example, does this mean in the case of quiet disclosure that a taxpayer who knows he
or she committed a criminal act is required to self-impose the appropriate civil penalties that
would otherwise apply to the criminal conduct? Thus, if the original return were fraudulent, is the
1400
See Blauner v. United States, 293 F.2d 723, 729-730, 724-735 (8th Cir. 1960), cert.
denied 368 U.S. 931 (1961).
- 562 -
taxpayer required to advise the IRS on or with the amended return that he or she is subject to the
civil fraud penalty and pay that penalty if possible? Most practitioners say that such self-imposed
penalty assessments are not required to qualify for voluntary disclosure. The assessment of the
penalty is not the prerogative of the taxpayer, but is instead the prerogative of the IRS. The IRS will
often, even usually, assert some penalty upon receiving an amended return reporting substantial
additional tax liability or for a delinquent original return, but the taxpayer should await the IRSs
call on that one without great concern that he has not been cooperative.
The tougher question will be whether and how hard the taxpayer might want to fight the
imposition of any penalty that the IRS imposes upon receipt of the return. For reasons noted above,
the IRS may not assert any penalty after either type of disclosure noisy or quiet. But, if it were
to do so, what should be the taxpayers response, keeping in mind that his conduct may have been
subject to the civil fraud penalty. Smart taxpayers, particularly in a fraud situation, might not want
to fight for a host of strategic reasons which, in the interest of keeping these materials to an
acceptable size, cannot be explored here. Would fighting the penalty be deemed noncooperation?
Frequently, persons desiring to qualify under this policy will not have the funds to pay the
taxes, penalties and interest that are then due. Does this exclude from the policy taxpayers who
cannot pay in full? Surely not, but this too is the authors judgment call based on experience and
a logical implementation of the policy. Of course, the taxpayer will want to avoid delay and footdragging, in order to meet the cooperation requirement. Accordingly, if the quiet disclosure method
is used, where the taxpayer cant fully pay, the taxpayer should include as much payment as possible
with the return and a cover letter or a statement attached to the return saying that he or she cannot
pay the amount required but desires to cooperate and work with the IRS under existing procedures
to resolve the liability. The taxpayer should thereafter cooperate with the IRS collection personnel.
Existing collection procedures include installment agreements and offers in compromise. The key,
of course, is for the taxpayer to show the good faith that eluded Tenzer.
If the IRS decides to investigate the circumstances of the original fraud or even the decision
to disclose voluntarily, can the IRS require the taxpayer to waive his privileges in order to meet the
cooperation requirement of the policy? Obviously, the taxpayer has disclosed the underlying fraud
itself and has thus waived his Fifth Amendment privilege as to that conduct, although if the IRS
started a full-blown inquiry and the taxpayer was really concerned, he could reassert that privilege
to avoid future disclosures of information privileged under the Fifth Amendment. But what if the
taxpayer had other criminal conduct, not necessarily tax criminal conduct, but still related to the tax
fraud? Can the taxpayer assert the Fifth Amendment privilege and still qualify? Note that the IRS
policy above applies only to legal source income, so this might be a disqualification ab initio if the
untaxed income is illegal source income.1401 Similarly, can the taxpayer assert the attorney-client
privilege for advice he or she received in the course of considering and making voluntary
disclosure? And, can the taxpayer claim the new practitioner privilege, 7525, to prevent the IRS
1401
The policies do apply only to legal source income. In appropriate cases, however,
a taxpayer with illegal source income might want to try the noisy disclosure route to see if he or she
can get the needed assurance from the Chief of CI. If the Chief gives the assurance, it will certainly
be honored. That type of advance assurance cannot be achieved via the quiet disclosure route.
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from learning confidences incident to the original return preparation and still qualify for the
privilege? These issues are yet to be decided.
g.
Events That Prevent Timeliness or Voluntariness.
If the IRS gets on the taxpayers trail or a series of events is in place that will likely put the
IRS on the taxpayers trail, the policy does not apply. As set forth in the IRM, these events are a
civil or criminal investigation, third party information about that taxpayers noncompliance, another
civil or criminal investigation that would likely lead to the taxpayer or information from another
criminal enforcement investigation.1402 I hope you can see why this limitation on the policy is
necessary. If all a taxpayer had to do to solve a criminal problem was to fess up when caught and
maybe some civil penalties, the cost-benefit ratio of playing the audit lottery with fraudulent activity
would be heavily tilted in the taxpayers favor.
Previously, the IRM suggested that the voluntary disclosure practice was not available if
some series of events had transpired which made the IRSs discovery of the taxpayers malfeasance
inevitable. The limitation is not present in the current version of the practice. I urge the reader to
go back and read the policy and consider why I say that this limitation is not in the current version.
The reader will note that the practice is not available to a taxpayer if the IRS has started an
investigation of another taxpayer as to a matter that is directly related to the taxpayers liability.
This limitation should be read carefully, and obviously the practitioner should be prepared to mount
effective advocacy as to why his clients tax liability in the voluntary disclosure is not direct related
to another previously discovered taxpayers tax liability. I think advocacy, even in a close case,
might be effective here because the IRS could lose more than it could gain by applying the voluntary
disclosure practice too narrowly. That is to say, that the IRS and DOJ Tax can get plenty of fodder
for its criminal tax enforcement priorities without being stingy about voluntary disclosure. Your job
may be to help the IRS and / or DOJ Tax CES realize that priority in your clients specific case.
h.
Special Voluntary Disclosure Initiatives.
In major areas of noncompliance where the IRSs ability to detect noncompliance is limited
or other special factors exist, the IRS may offer special voluntary disclosure type initiatives in
order to encourage compliance. I mention here three prominent recent examples.
(1)
Earlier Offshore Voluntary Compliance Initiative

(and Related Audit Initiatives).
In the later 1990s, the IRS initiated a major initiative to identify taxpayers using offshore
credit cards, and more broadly offshore financial institutions, as a means of implementing tax crimes
with minimal (they think) risk of detection. Using so-called John Doe summonses against credit and
debit card processors in the U.S. targeting transactions for tax have foreign bank cards, the IRS
began tracing the tax have bank credit card charges through the vendors where the charges were
made and on to the taxpayers; with some Sherlock Holmes techniques and some luck, the IRS could
1402
See 9.5.11.9 Voluntary Disclosure Practice (12-02-2009), at par. (4).
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often identify the U.S. taxpayers and start U.S. audits and, where appropriate, criminal investigation
processes.1403 As an early part of this initiative, the IRS encouraged taxpayers with this problem to
voluntarily disclose, and offered reasonable assurance that qualifying taxpayers will not be
prosecuted. This initiative was called the Offshore Voluntary Compliance Initiative (OVCI). The
IRS did not expect all taxpayers to accept this voluntary disclosure offer, and thus will still have
plenty of taxpayers that it can identify and prosecute. But, for those taxpayers within the scope of
the offer, it did offer reasonable assurance that they would not be prosecuted. Still, during audits
in which an offshore account was identified or suspected, the IRS usually offered the taxpayers a
similar program with stiffened penalties that were still much better than worst case called the Last
Chance Compliance Initiative (LCCI).
(2)
Tax Shelter Initiatives.
In the early 2000s after a wave of abusive tax shelters, the IRS announced initiatives as to
particular highly marketed shelters permitting taxpayers to limit their risk by voluntary disclosure.
These initiatives usually facially offer relief only with respect to the taxpayers civil exposure
(principally because the complexity of the shelters and the presences of opinions for major tax
firms criminal prosecution would be unlikely). But, in situations where the opinions were mere
window dressing which the taxpayer really did not believe (often with the assistance of his own
independent counsel), careful practitioners would at least be concerned that there might criminal
investigation or prosecution. The general thinking is that, in the unlikely event the taxpayers
conduct might otherwise be potentially subject to criminal prosecution, participation in the program
with full disclosure will avoid the criminal problem.
(3)
2009 Offshore Account Initiative.
After a further highly publicized round of attacking offshore accounts in 2008 and 2009
(including a deferred prosecution agreement with UBS, a major Swiss bank and a John Doe
Summons to UBS), the IRS announced a program similar to the OVCI initiative, but broader in
scope designed to sweeten the pot for taxpayers by reducing the exposure for civil penalties and
assuring that the taxpayer coming into the program will not be prosecuted.1404 The program
extended through October 15, 2009. The key features of the program were:
1. Taxpayer must file amended income tax returns or, if no original income tax returns were
filed, delinquent income tax returns for 6 years and pay tax, interest, and a 20% accuracy related
penalty or 25% delinquency penalty, as appropriate. The carrot here is that the IRS will not assert
the fraud penalty which is 75% as to fraudulent returns or fraudulent failure to file.
1403
See T. Keith Fogg, Taxation of Offshore Accounts: Go West: How the IRS Should
Foster Innovation in its Agents, 57 Vill. L. Rev. 441 (2012), discussing the history of the
development of this initiative.
1404
The program (including its processing features) is announced in a series of
memoranda, FAQs and accompanying press releases. The FAQs offer the principal guidance and
may be viewed here: http://www.irs.gov/newsroom/article/0,,id=210027,00.html.
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2. Taxpayer must file amended or delinquent FBARs (the information return for foreign bank
accounts) and pay 20% penalty on the amount in nontax compliant foreign bank accounts and
foreign assets in the year with the highest aggregate account or asset value in lieu of all other
applicable penalties. The carrot here is that the IRS will not assert the maximum penalty ($100,000
or 50% of the amount in the account) for each year. The 20% penalty imposed pursuant to the
program may be reduced to 5% if the taxpayer didn't open the account, there was no account activity
while the taxpayer controlled the account, and all taxes have been paid on the account.
3. The taxpayer must file the various other forms that may be required but the IRS will not
assert the penalties that might apply to them. In some cases, the IRS will allow intermediate entities
that served no purpose other than hide the accounts to be shammed out (ignored for purposes of
these various forms, such as 5471). The carrot here is that the IRS will not assert the otherwise
substantial penalties for those delinquencies.
4. The program is available only to those who meet the voluntary disclosure policy in IRM
9.5.11.9. Although, in other contexts, practitioners pursue voluntary disclosures through disclosures
by simply filing with the service center and through noisy disclosures (meetings with IRS CI), the
program appears to contemplate only noisy disclosures (e.g., initial screening at CI is required and
a closing agreement is required). This means more work for lawyers because most clients should be
guided through the process that may have major downsides for the unwary.
5. The taxpayer otherwise must fully cooperate.
6. If the foregoing conditions are met and agreed upon, the IRS will not pursue criminal
prosecution.
(4)
2011 Voluntary Compliance Initiative (OVDI)
After OVDP lapsed, there was a period of uncertainty as to what opportunities were available
to taxpayers to make a voluntary disclosure. Finally, in 2011, the IRS announced another initiative
similar to OVDP available, as extended, until September 9, 2011.1405 Most of the requirements and
costs were the same as the 2009 OVDP, except that taxpayers had a longer number of years for
which amended returns and delinquent FBARs were required (i.e., back to 2003, but a couple of
years had elapsed) and the in lieu of penalty increased to 25%.
(5)
Current Voluntary Disclosure for Offshore

Accounts.
After OVDI lapsed, there was again a period of uncertainty. The IRS announced that regular
voluntary disclosure program was still open for taxpayers with unreported offshore accounts. The
practitioner community expected the process of such voluntary disclosures would be under the
procedures and subject to the requirements of OVDI, subject to further refinements and changes.
1405
The details of this program are also set forth in FAQs on the IRS website. The
website for the FAQs is http://www.irs.gov/businesses/international/article/0,,id=235699,00.html.
- 566 -
Most importantly, however, there was considerable concern that the IRS would increase the
penalties for persons who did not get in the earlier programs. Thus, there appeared to be sufficient
uncertainty that taxpayers and practitioners were reluctant to use the general voluntary disclosure
practice.
To quell the uncertainty and encourage further voluntary disclosures, in January 2012, the
IRS announced an indefinite re-opening of OVDI program.1406 Essentially, the features of the earlier
program are in tact, except (i) the in lieu of penalty rate has increased from 25% under OVDI to
27.5% under the extended program and (ii) amended returns are required only for up to 8 years.1407
The income tax penalty remains at 20%.
(6)
Opting Out of OVDP and OVDI (Including

Extended OVDI).
The program penalties, including principally the in lieu of penalty in OVDP and OVDI
(including extended OVDI) are significant and are a one-size fits all penalty. The IRS recognized
that some taxpayers entering the program may not be as culpable as that one size penalty suggests.
The IRS thus offered those taxpayers the opportunity to opt out of the civil penalty structure of
the program and subject themselves to a regular civil audit.1408 Taxpayers so opting out are unable
to re-join the program penalty structure if the IRS, upon audit, asserts greater penalties than the
program required (as outlined above).
Because it is not certain how the IRS is administering the FBAR penalty regime in audits,
many taxpayers viewed this opportunity to opt out with considerable concern. As of this
presentation, there is not enough anecdotal evidence as to what is being done in audits to offer any
guidance. I will offer the following observations based upon my experience and thinking about the
opt out opportunity:
The decision to opt out should be made only with the advice of experienced counsel.
1406
See http://www.irs.gov/newsroom/article/0,,id=252162,00.html.
As this is worded, I suppose, this could offer an incentive to delay joining the
program to let some of the early years lapse. I dont think there will be much incentive because of
all the reporting requirements that the taxpayer should begin on a go-forward basis while awaiting
the lapse of earlier years.
1408
In OVDP, there was an analogous process actually within the program without opting
out to have what is called an FAQ 35 review to insure that the program penalties were not in excess
of the penalties the IRS would otherwise assert. Technically, this was inside OVDP rather than an
opt out, but the drill was essentially the almost the same as the opt out audit. Perhaps the key benefit
of the FAQ 35 review was that it did not require the taxpayer to give up the benefits of the program
penalties in order to find out what the alternative result would be. Under the opt out described in
the text, the taxpayer would not know what the alternative result is until he or she has given up the
penalty regime inside the program.
1407
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The opt out audit will permit adjustments for all open years. The statute of
limitations for income tax adjustments is normally 3 years, but may be 6 years in the
case of a 25% omission of gross income and unlimited in the case of civil fraud. The
statute of limitations for FBAR penalties is 6 years.
Taxpayers clearly intending to use foreign accounts for tax noncompliance (such as
via offshore entities to mask beneficial ownership of foreign accounts) should not opt
out. Those persons are at high risk of the maximum FBAR penalties the willful
penalty of 50% of the amount in the account for multiple years (although one can
infer from the criminal cases that the IRS would only assert that penalty for a single
year). They are also at risk of many years potentially even before 2003 being
open and subjected to tax, civil fraud penalties and interest for those years. They
also would be subjected to foreign entity related tax penalties, which can be
significant. These taxpayers should not opt out.
Other taxpayers may have a shot at a lesser penalty, but I strongly recommend that,
except in the simplest and most clearly innocent of cases, they only do so with the
counsel of an experienced tax attorney.
Opting out is a major advantage if the foreign noncompliant assets are weighted
toward assets other than foreign financial accounts (such as real estate or entities)
which must be included in the penalty base inside the civil penalty structure in the
program. On opt out, however, the IRS cannot include only foreign financial
accounts in the FBAR penalty. However, those considering this type of opt out
should consider the additional other income tax penalties that might apply. I noted
above the civil fraud penalty, but a taxpayer with a civil fraud penalty risk is not a
good candidate for opting out. The other income tax penalties that might apply relate
principally the penalties for failing to report and file with respect to foreign entities
(corporations and trusts), which can be significant.
Taxpayers must do the drill of making at least business-judgment what if type

calculations for the opt out.
4.
Investigation Phase.
a.
Taxpayer Interviews and Modified Miranda Warnings.

(1)
Introduction.
The Fifth Amendment clearly covers IRS attempts to solicit information (admissions) from
the taxpayer during the investigative phase. Thus, the IRS can issue an administrative summons
under 7602 or, if the grand jury stage has been reached, the prosecutor can cause the grand jury
to issue a grand jury subpoena to the taxpayer. But, the taxpayer can properly claim the Fifth
Amendment privilege at each stage.
- 568 -
The taxpayer who is represented at the time the Special Agent seeks to interview him will
be fully counseled as to his Fifth Amendment right and how it may be asserted. The uncounseled
taxpayer is the one who is at risk. Thus, it is not unusual, particularly in informant situations, for
the taxpayer to be unaware of any IRS criminal investigation interest in him when he receives an
unsolicited visit from two CI agents (or one CI agent and a civil agent). Two agents are involved
so that, if the taxpayer makes damaging admissions, the IRS will have two witnesses to the
admissions. (You will remember that damaging admissions by a party are admissible under the
hearsay rule.)
The following from the IRM advises the agent of his or her responsibilities in such a
noncustodial interview:
9.4.5.11.3.1 Informing of Constitutional Rights in Non-Custodial Interviews
(05-15-2008)
(1) The special agent will advise the individual of his/her constitutional rights during
non-custodial interviews when the individual is a subject of an investigation, a
corporate officer or employee who appears to be implicated in an alleged
wrongdoing involving a corporation under investigation, or when a witness'
statement would incriminate the witness.
(2) The special agent will not use language that could be interpreted as a promise of
immunity or settlement of the subject's investigation, or that might be viewed as
intimidation or a threat in order to secure the subject's confession.
(3) To defend against an attack on the admissibility of any statement or documentary
evidence furnished by a subject under investigation, the special agent will always
inform the subject of his/her constitutional rights at the beginning of a formal
question and answer interview, even if the subject had previously been advised.
(4) Failure to give subjects the constitutional warnings prescribed by Internal
Revenue Service procedures has resulted in the exclusion of evidence obtained from
the subjects. See US v. Leahey and US v. Heffner.1409
1409
United States v. Leahey, 434 F.2d 7 (1st Cir. 1970); and United States v. Heffner, 420
F.2d 809 (4th Cir. 1969). My colleague, Jim Devita, has noted in a brief he gave me the following:
Notwithstanding the reference to Leahey in the 2008 edition of the IRM cited above,
in a subsequent decision, United States v. Irvine, 699 F.2d 43, 46 (1st Cir. 1983), the
First Circuit indicated the view that the holding in Leahey did not survive the
Supreme Courts decision in United States v. Caceres, 440 U.S. 741 (1979). The
sound reasoning of Leahey, however, does not appear actually to have been affected
by Caceres, where the Supreme Court declined to adopt any rigid rule requiring
federal courts to exclude any evidence obtained as a result of a violation of [the
IRM]. Caceres, 440 U.S. at 755 (emphasis added). Caceres is distinguishable from
Leahey since Caceres involved only a technical rule regarding the internal IRS
- 569 -
9.4.5.11.3.1.1 Subject of Investigation (02-01-2005)

(1) At the start of the initial interview with the subject of an investigation, a special
agent(s) should do the following:
(a) Identify himself/herself as a special agent of the IRS, CI and provide
his/her last name along with an introduction by title and last name of any
other officials present.
(b) Display authorized credentials and badge of authority to the subject for
visual examination, (always maintain physical control of the badge and
credentials and never allow anyone to duplicate, photograph or make an
impression of your identification).
(c) Provide the subject of the investigation with the special agent(s) unique
Identification Number (see IRM 1.2.4, Use of Pseudonyms by Internal
Revenue Service Employees) and phone number, either verbally or in writing
as required by RRA 98, Section 3705 (a).
Note: Special agents are required to provide the subject and the subjects
representative with his/her unique Identification Number and phone number
at the initial contact.
(d) The special agent will advise the subject, "As a special agent, one of my
functions is to investigate the possibility of criminal violations of the Internal
Revenue laws and related offenses. "
(2) Advise the subject of the investigation as follows: "In connection with my
investigation of your tax liability (or other matter), I would like to ask you some
questions. However, first I advise you that under the Fifth Amendment to the
Constitution of the United States, I cannot compel you to answer any questions or
to submit any information if such answers or information might tend to incriminate
you in any way. I also advise you that anything which you say and any documents
which you submit may be used against you in any criminal proceeding which may
be undertaken. I advise you further that you may, if you wish, seek the assistance of
an attorney before responding. Do you understand these rights?"
(3) If the subject requests clarification, either as to his/her rights or the purpose of
the investigation, the special agent will give such explanation as is necessary to
clarify the matter for the subject.
procedure to obtain advance agency approval to record consensual conversations
with a taxpayer, and the violation of the regulation was neither deliberate nor
prejudicial, and did not affect any constitutional or statutory rights. Id. at 743.
Thus, Caceres held only that not all violations of regulations require suppression; it
did not hold that no violation of agency regulations can be the basis for suppression.
Here, as in Leahey, the defendants Fifth Amendment right to decline to answer
questions and his Fourth Amendment right against surrendering potentially
incriminating documents were involved, and a purported waiver of them was
obtained without the warnings required by IRS regulation.
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(4) The special agent will immediately terminate the interview if at any stage of an
interview the subject indicates the wish to exercise rights to either withhold
testimony or records, or to consult with an attorney.
(5) The special agent will write a contemporaneous memorandum stating the
following:
(a) the manner in which the special agent identified himself/herself, including
providing the subject with the special agent'(s) unique Identification Number
and phone number
(b) when and where the subject was advised of constitutional rights
(c) what additional explanation, if any, was made
(d) how the subject responded
(e) who was present at the time
(6) During subsequent contacts with the subject, the subject should be advised of
his/her constitutional rights before questioning.
(7) All contacts with the subject and/or their representative are to be documented in
accordance with established policy and procedures.
The Supreme Court held in Beckwith v. United States1410 that the full Miranda warnings are
not constitutionally required in a noncustodial interview by CIs Special Agents. In Beckwith,
although the majority did not speak to the issue, Justice Marshall stated in a concurring opinion that
he would have suppressed if Special Agents had not given the modified Miranda warnings. In other
words he would have found even in a noncustodial interview by IRS special agents sufficiently
coercive circumstances to invoke the protections of the constitution and require the modified
Miranda warnings, albeit not the full-blown Miranda warnings. Since the Special Agents did give
the modified warning, Justice Marshalls comments do not indicate a point of difference with the
majority and thus the Beckwith case holds open the possibility that the Special Agents failure to
give the warnings (or, by extension, a civil IRS agents failure to give the warnings after a civil
investigation has turned criminal in scope) may require exclusion of evidence.
The question therefore is whether the IRSs failure to give these warnings (or failure to be
able to prove that it gave the warnings) can deny the IRS the ability to use the fruits of the interview,
specifically any incriminating admissions. This raises several questions, all interrelated: whether
any constitutional warning is required in a noncustodial setting; if so, what is the scope of the
warning; and whether an IRM requirement for a warning will, of its own force, justify suppression.
The IRM cautions that some courts might suppress any admissions the taxpayer makes. Consider
the following case:
1410
425 U.S. 341 (1976) (but note critically that the modified Miranda warnings set forth
in the IRM were given in Beckwith).
- 571 -
(2)
The Caceres Doctrine.
In United States v. Caceres,1411 the defendant had conversations with an IRS agent that were
secretly recorded. The agent had not obtained the approvals for the tapings as required by the IRM.
The issue was whether the fruits of the tapes could be suppressed. The Court held that they could
not. The Court then reasoned:
Respondent argues that the regulations concerning electronic eavesdropping,
even though not required by the Constitution or by statute, are of such importance
in safeguarding the privacy of the citizenry that a rigid exclusionary rule should be
applied to all evidence obtained in violation of any of their provisions. We do not
doubt the importance of these rules. Nevertheless, without pausing to evaluate the
Governments challenge to our power to do so, we decline to adopt any rigid rule
requiring federal courts to exclude any evidence obtained as a result of a violation
of these rules.
Regulations governing the conduct of criminal investigations are generally
considered desirable, and may well provide more valuable protection to the public
at large than the deterrence flowing from the occasional exclusion of items of
evidence in criminal trials. Although we do not suggest that a suppression order in
this case would cause the IRS to abandon or modify its electronic surveillance
regulations, we cannot ignore the possibility that a rigid application of an
exclusionary rule to every regulatory violation could have a serious deterrent impact
on the formulation of additional standards to govern prosecutorial and police
procedures. Here, the Executive itself has provided for internal sanctions in cases
of knowing violations of the electronic-surveillance regulations. To go beyond that,
and require exclusion in every case, would take away from the Executive Department
the primary responsibility for fashioning the appropriate remedy for the violation of
its regulations. But since the content, and indeed the existence, of the regulations
would remain within the Executives sole authority, the result might well be fewer
and less protective regulations. In the long run, it is far better to have rules like those
contained in the IRS Manual, and to tolerate occasional erroneous administration of
the kind displayed by this record, than either to have no rules except those mandated
by statute, or to have them framed in a mere precatory form.
The case gave birth to the Caceres doctrine which holds that internal agency rules not
required by the Constitution or a law generally do not confer rights upon citizens that are to be
vindicated by suppression of evidence for their violation. The Fifth Circuit has described this rule
as follows:
As a general rule, the internal operating procedures of the IRS as described in the
Internal Revenue Manual do not create rights in the taxpayer and thus a violation of
these procedures does not establish a cause of action for the taxpayer. See United
1411
440 U.S. 741 (1979).
- 572 -
States v. Caceres, 440 U.S. 741, 752 (1973); Cargill, Inc. v. United States, 173 F.3d
323, 340 n.43 (5th Cir. 1999). A corollary to this broad rule has developed however
-- that internal operating procedures intended to protect a citizens constitutional
rights can establish a cause of action. See, e.g., United States v. McKee, 192 F.3d
535, 544 (6th Cir. 1999) (If the IRSs internal operating procedures afford anything
less than faithful adherence to constitutional guarantees, then public confidence in
the IRS will necessarily be undermined); United States v. Horne, 714 F.2d 206, 207
(1st Cir. 1983) (per curiam). 1412
(3)
Are Warnings Required?
I noted above that, in Beckwith, the Supreme Court rejected the requirement for full-blown
Miranda warnings in IRS noncustodial settings but that, in that case, the modified Miranda warnings
had been given. Usually, as in Beckwith, CI Special Agents give the modified Miranda warnings,
so the Government will not be required to argue Caceres in the normal criminal investigation. If,
in a rare instance where an IRS Special Agent were to fail to give the modified Miranda warning,
I suspect the IRS would forego the use of the evidence at trial unless it wanted to set up the issue
not address in Beckwith where the modified Miranda warnings were given. Indeed, the related areas
in which the issue has arisen has produced opinions which assume that the warnings would be
required in an IRS criminal investigation, so the issue in the cases turn upon whether the IRS
investigation was a civil or criminal investigation at the time the interrogation occurred.
The issue usually arises where the case is first developed as a civil audit, and the Revenue
Agent (as opposed to a Special Agent) conducts the critical interview where damaging admissions
are made before referral to CI and without giving the modified Miranda warnings which civil agents
are not trained to give. The question is whether those admissions may be suppressed. There are
cases that hold that, if the agent has done anything to mislead the taxpayer as to the nature of the
audit (i.e., some representation that it is civil rather than criminal or some failure to advise in a
situation where there was a duty to advise), then the admissions may be suppressed. For example,
in United States v. Tweel,1413 the Court suppressed all evidence, not only admissions, obtained after
the taxpayer was misled because obtained in violation of the Fourth Amendment by fraud, trickery
or deceit. In response to Tweel, the IRS adopted an IRM requirement that civil agents must not
mislead as to the nature of the investigation and must refer the case to CI once they have a firm
indication of fraud so that, prior to interviews, they would be given the warnings. The question
then is whether suppression is appropriate for information developed by the civil agent after such
a firm indication of fraud. Of course, the IRS is entitled to interview the taxpayer even after a firm
1412
Oxford Capital Corp. v. United States, 211 F.3d 280, 286 n. 3 (5th Cir. 2000).
1413
550 F.2d 297 (5th Cir. 1977). In an immigration case, the Fifth Circuit recently
summarized Tweel and its progeny as requiring: (1) a material misrepresentation about the nature
of the investigation, and (2) that the taxpayer bear the burden of proving the material
misrepresentation. United States v. Carriles, 541 F.3d 344, 353-361 (5th Cir. 2008). The Court
further held mere failure to advise that the information from the interview may be used in a criminal
case is not sufficient; there is no affirmative duty to warn. Id.
- 573 -
indication of fraud, but the key issue is at which point the IRS must give the modified Miranda
warnings or suffer suppression of admissions or other fruits of the interview.
Most cases resolve the issue by avoiding it -- i.e., by making a finding that, at the time of the
interview(s), the civil agent (revenue agent) had no firm indication of fraud.1414 But, even when thus
avoiding the issue, the courts sometimes caution the IRS to comply with the referral requirement
once there is a firm indication of fraud and that failure to do so and proceeding without giving the
modified Miranda warnings would constitutionally require suppression.1415 The notion is that, in
view of the constitutional imperatives in Miranda (see particularly Dickerson1416) and the particular
application of those imperatives to noncustodial IRS interviews reflected in the IRM, at least the
modified Miranda warnings are required and, in a variation on that theme, because the IRS has
assured taxpayers and the practicing community that its agents will refer once there is a firm
indication of fraud, a civil agent proceeding beyond that point is obtaining evidence by
misrepresentation or fraud, trickery or deceit. In short, there has to be some line in this area, the IRS
has drawn the line in the IRM, and, while it might not be the only line that could be drawn, it is one
that is sensibly drawn in the unique area of IRS investigations and does address the constitutional
imperatives in Miranda. It is a line that should be respected and the sanction for crossing that line
should be suppression. Nevertheless, the trend seems to be that courts hold that there is no
suppression sanction for violating the IRM requirement in the absence of some affirmative
deception.1417
So what is the remedy for an IRS violation of the IRM in these respects? If suppression is
not required, it appears that there is no remedy that will benefit the taxpayer. Section 1203 of the
1998 Restructuring Act sets forth the so-called 10 deadly sins that require that an IRS employee
committing any of the sins be terminated from employment. One of the sins is the violation of the
IRM in order to harass or intimidate a citizen (taxpayer). This is useful to know, but not very
relevant to representing or even prosecuting a taxpayer. Most taxpayers who are required to pack
their toothbrush for some time off as the guest of the Government may not find a great deal of
satisfaction in the mere fact that the agent whose violation of the IRM caused their woe will be
1414
See e.g., United States v. Peters, 153 F.3d 445 (7th Cir. 1998), cert. denied, 525 U.S.
1070 (1999).
1415
See United States v. McKee, 192 F.3d 535, 537-538 (6th Cir. 1999), but see United
States v. Rutherford, 555 F.3d 190 (6th Cir. 2009) (rejecting McKees suggestion that just violating
the IRM by continuing the civil audit after a firm indication of fraud would require dismissal).
1416
Dickerson v. United States, 530 U.S. 428 (2000).
1417
See United States v. Rutherford, 555 F.3d 190 (6th Cir. 2009); United States v.
Kontny, 238 F.3d 815 (7th Cir. 2001); United States v. Greve, 490 F.3d 566, 571 (7th Cir. 2007);
United States v. Carriles, 541 F.3d 344 (5th Cir. 2008) (a nontax case, but discussing the concept in
the context of a potential dual investigation); see also John A. Townsend, Taxpayer Rights in
Criminal Investigations, 2001 TNT 52-63 (March 12, 2001); and Amanda A. Cochran, Comment:
Evidence Handed to the IRS Criminal Division on a Civil Platter: Constitutional Infringements
on Taxpayers, 91 J. Crim. L. & Criminology 699 (2001).
- 574 -
terminated. The taxpayers would much rather that the evidence be excluded from their criminal
trials, but that is not the remedy Congress legislated.
Thus we still have the rule announced in Caceres that IRM provisions that are not based on
constitutional or statutory imperatives do not create rights in the citizens. You must think creatively
about what is a provision based upon constitutional or statutory imperatives. Most courts, for
example, have not viewed the IRM requirement that the civil agent must transfer the case to CI after
a firm indication of fraud as based upon a constitutional imperative. However, the Sixth Circuit in
McKee did so view that requirement. The Seventh Circuit in Kontny disagreed. Through critical
thinking and skillful advocacy, you may be able to convince a court that there is such a nexus and,
equally important in this context, may be able in the pre-indictment stage to convince the
Government (the IRS or DOJ Tax, depending upon the stage) that there is some risk in pursuing the
matter.
b.
Current Year Returns.
See the discussion above as to whether the existence of an IRS investigation permits a
taxpayer who is the target to forego filing current year returns.
5.
Trial Phase.
The Fifth Amendment Privilege may be asserted at trial. The taxpayer invokes his Fifth
Amendment privilege by declining to testify. There appear to be no unique tax related issues in the
treatment of the Fifth Amendment privilege at trial.
6.
Scope Issues.
a.
Introduction.
Any witness, including the taxpayer being investigated or questioned, may invoke the Fifth
Amendment privilege to avoid giving incriminating testimony. This right to invoke the Fifth
Amendment applies equally in situations where testimony is in a compulsory setting (i.e., pursuant
to summons or subpoena) or is in a more voluntary setting (e.g., incident to a criminal investigation).
I discussed one aspect of this above in discussing the modified Miranda warnings given by IRS
criminal investigators.
As with all privileges, the witness bears the burden of establishing the right to the privilege.
For the Fifth Amendment privilege to apply, the witness must show at least facially that a responsive
answer to the question asked may tend to incriminate. In most cases, the right to assert the privilege
will be obvious -- why were you running from the bank after it had just been robbed and the alarm
bell was sounding? But in other cases, the right to invoke may be more subtle.
- 575 -
b.
The Fifth Amendment and Documents.
The most important scope issue encountered in criminal tax investigations (as well an white
collar crime investigations) is whether a witness may refuse to produce incriminating documents.
The right to remain silent as to oral testimony or statements is well-known to law students and
practitioners. Since taxpayers at least well represented taxpayers rarely give incriminating
statements, the Government typically makes its case from testimony of others and/or documents.
Tax investigations are usually document based cases. So, if the Government cant get the
documents, often it cannot make a case. The issue addressed here is whether the taxpayer (or any
witness) has a Fifth Amendment privilege with respect to documents that he or she possesses.
There has been a shift in Fifth Amendment jurisprudence to narrowly circumscribe the
privilege with respect to existing documents. The theory is that, as to existing documents, the
witness is not being compelled to testify but is rather merely being required to produce documents
that nobody forced him or her to prepare or possess. In such a case, the only testimony the witness
is being compelled to give is any testimony that may be inherent in the act of production. The
Fifth Amendment is thus limited to the testimonial aspects of the act of production.
In In Re: Grand Jury Subpoena Duces Tecum Dated October 29, 1992,1418 the issue was
whether the SEC could subpoena a breast pocket daily calendar. The court analogized the daily
calendar to a personal document rather than a business document. The following are excerpts from
the opinion:
A. Contents-Based Privilege
Doe maintains that the contents of the calendar are protected from compelled
production by the Fifth Amendments Self-incrimination Clause, which provides,
No person . . . shall be compelled in any criminal case to be a witness against
himself. While we have previously left undecided the question of whether the Fifth
Amendment protects the contents of private papers that are not business
documents, * * *, we now rule that it does not.
In arguing for a contents-based privilege, Doe relies principally upon Boyd
v. United States, 116 U.S. 616 * * * (1886), which involved a civil forfeiture
proceeding against two partners charged with importing glass without paying the
prescribed duty. Over the partners objections, the government obtained a court order
requiring them to produce the invoice for the glass. After the invoice was admitted
at trial, the glass was ordered forfeited. The Supreme Court reversed, holding that the
order violated both the Fourth and Fifth Amendments.
In so ruling, the Court concluded that the Fourth Amendment applied to court
orders in the nature of subpoenas duces tecum in the same manner that it applied to
search warrants, and that the government could not, consistent with the Fourth
1418
1 F.3d 87 (2d Cir. 1993), cert. denied, 114 S. Ct. 920 (1994).
- 576 -
Amendment, seize a persons documents as evidence unless it had a superior

proprietary interest in them. Id. at 622-24. The Court also held that a defendant in
a criminal or forfeiture case could not be compelled to produce certain evidentiary
items without violating the Fifth Amendment, stating, [A] compulsory production
of the private books and papers of the owner of goods sought to be forfeited . . . is
compelling him to be a witness against himself, within the meaning of the Fifth
Amendment to the Constitution. Id. at 634-35.
Several aspects of the Boyd decision did not endure. Nevertheless, the
pronouncement in Boyd that the Fifth Amendment protects against the compelled
production of private papers often appeared as dictum in later Supreme Court
opinions. See, e.g., Wilson v. United States, 221 U.S. 361, 377, * * * (1911); United
States v. White, 322 U.S. 694, 698-99 * * * (1944); Schmerber v. California, 384
U.S. 757, 763-64 * * * (1966); Bellis v. United States, 417 U.S. 85, 87 * * * *
(1974). In a series of decisions beginning with Fisher v. United States, 425 U.S. 391,
408 * * * (1976), however, the Court raised serious doubt as to the continued validity
of that pronouncement.
In Fisher, the Court ruled that taxpayers Fifth Amendment privileges against
self-incrimination did not shield them or their attorneys from complying with IRS
summonses directing the production of tax records prepared by the taxpayers
accountants. Rejecting the taxpayers reliance on Boyd, the Court noted that because
much of Boyds doctrine had not stood the test of time, id. at 407, the prohibition
against forcing the production of private papers has long been a rule searching for
a rationale consistent with the proscriptions of the Fifth Amendment against
compelling a person to give testimony that incriminates him. Id. at 409.
The Court also emphasized that the Fifth Amendment does not
independently proscribe the compelled production of every sort of incriminating
evidence but applies only when the accused is compelled to make a testimonial
communication that is incriminating. Id. at 408 (emphasis omitted). Since the
accountants papers were not prepared by the taxpayers, they contained no
testimonial declarations by [them]. Id. at 409. And since the preparation of all of
the papers sought was wholly voluntary, . . . they cannot be said to contain compelled
testimonial evidence, either of the taxpayers or of anyone else. Id. at 409-10
(footnote omitted). The Court thus concluded that the summonses were enforceable
unless the act of producing the documents was itself subject to a valid Fifth
Amendment privilege. Id. at 410.
The Fisher Court also rejected the notion, which it traced to Boyd, that the
Fifth Amendment provides any general protection of privacy:
Within the limits imposed by the language of the Fifth Amendment,
which we necessarily observe, the privilege truly serves privacy interests; but
- 577 -
the Court has never on any ground, personal privacy included, applied the
Fifth Amendment to prevent the otherwise proper acquisition or use of
evidence which, in the Courts view, did not involve compelled testimonial
self-incrimination of some sort.
***
We cannot cut the Fifth Amendment completely loose from the
moorings of its language, and make it serve as a general protector of privacy
- a word not mentioned in its text and a concept directly addressed in the
Fourth Amendment. We adhere to the view that the Fifth Amendment
protects against compelled self-incrimination, not [the disclosure] of private
information. * * * *.
Id. at 399-401 (alteration in original) (footnote omitted). Nevertheless, the Court
expressly declined to decide whether the Fifth Amendment would protect against the
disclosure of private papers such as a taxpayers own tax records in his
possession. Id. at 414.
In Andresen v. Maryland, 427 U.S. 463 * * * (1976), decided shortly after
Fisher, the Court reiterated that any self-incrimination analysis must focus on the
voluntariness of the communication at issue. Rejecting a claim that the Fifth
Amendment was violated by the use against a criminal defendant of personal
business records seized pursuant to a lawful search, the Court reasoned that because
the records had been voluntarily committed to writing, and because the defendant
had not been forced to produce or authenticate them, use of the records did not
compel the defendant to incriminate himself. Id. at 473.
Then in United States v. Doe, 465 U.S. 605 (1984), the Court reaffirmed its
holding in Fisher and answered in the negative the question it had left open in that
case, ruling that the Fifth Amendment does not protect the contents of an individuals
business records in his own possession. Emphasizing that the Amendment protects
the person asserting the privilege only from compelled self-incrimination, id. at 610,
the Court held in substance that because the documents at issue were prepared
voluntarily, they cannot be said to contain compelled testimonial evidence in and
of themselves. Id. at 612 n.9 (citation omitted). Although the documents at issue
were business records, the Court stated broadly, If the party asserting the Fifth
Amendment privilege has voluntarily compiled the document, no compulsion is
present and the contents of the document are not privileged. Id. at 612 n.10. In a
separate concurring opinion, Justice OConnor wrote:
I write separately . . . just to make explicit what is implicit in the
analysis of [the Courts] opinion: that the Fifth Amendment provides
absolutely no protection for the contents of private papers of any kind. The
- 578 -
notion that the Fifth Amendment protects the privacy of papers originated in
Boyd * * *, but our decision in Fisher * * *, sounded the death knell for
Boyd. Several of Boyds express or implicit declarations [had] not stood the
test of time, * * *, and its privacy of papers concept had long been a rule
searching for a rationale . . . . * * * Todays decision puts a long overdue
end to that fruitless search.
Id. at 618 (second and third alterations in original). While no other justice joined in
Justice OConnors opinion, the decision in Baltimore Dept of Social Servs. v.
Bouknight, 493 U.S. 549 * * * (1990), suggests that a majority of the Court now
agrees with her position.
In Bouknight, the Court ruled that the Fifth Amendment did not shield a
mother from complying with a juvenile court order directing her to produce her
infant son. Citing Justice OConnors Doe concurrence, the Court stated that a
person may not claim the Amendments protections based upon the incrimination
that may result from the contents or nature of the thing demanded. Id. at 555. The
Court thus concluded that any Fifth Amendment privilege would have to arise from
the act of production, because when the government demands that an item be
produced, the only thing compelled is the act of producing the [item]. Id. at
554-55 (alteration in original) (quoting Fisher, 425 U.S. at 410 n.11).
Notwithstanding these recent decisions, Doe contends that Boyd still controls
this case, compelling the conclusion that the Fifth Amendment protects the contents
of voluntarily prepared, non-business documents such as the calendar. We disagree.
First, Boyd concerned business documents, and therefore its declarations
regarding the Fifth Amendments protection of non-business documents were dicta.
While the dicta of the Supreme court merits our deference, we also heed Chief
Justice Marshalls admonition that:
general expressions, in every opinion, are to be taken in connection with the
case in which those expressions are used. If they go beyond the case, they
may be respected, but ought not to control the judgment in a subsequent suit,
when the very point is presented for decision . . . .
* * * *.
Second, the Supreme Courts more recent opinions indicate that Boyds
foundations have eroded. The Court no longer views the Fifth Amendment as a
general protector of privacy or private information, but leaves that role to the Fourth
Amendment. See Fisher * * *; see also Doe * * * *. Self-incrimination analysis now
focuses on whether the creation of the thing demanded was compelled and, if not,
whether the act of producing it would constitute compelled testimonial
- 579 -
communication. See Doe* * *; Andresen * * *; Fisher * * *. Further, the Bouknight

Courts citation of Justice OConnors Doe concurrence indicates that this analysis
applies regardless of the contents or nature of the thing demanded. * * * *.
Third, the three courts of appeals that have considered this question have all
concluded that the Fifth Amendment does not protect the contents of voluntarily
prepared documents, business or personal. * * * *.
For these reasons, we conclude that because Doe voluntarily prepared the
calendar, its contents are not protected by the Fifth Amendment.
B. Act of Production Privilege.
While the contents of voluntarily prepared documents are not privileged, the
act of producing them in response to a subpoena may require incriminating testimony
in two situations: (1) if the existence and location of the subpoenaed papers are
unknown to the government; or (2) where production would implicitly
authenticate the documents. * * * *. Because neither of these situations exists here,
Doe has no act of production privilege. Production may not be refused if the
government can demonstrate with reasonable particularity that it knows of the
existence and location of subpoenaed documents. * * * *. Since Doe produced a
copy of the calendar to the SEC and testified about his possession and use of it, its
existence and location are foregone conclusions, and his production of the original
adds little or nothing to the sum total of the Governments information. Fisher, *
* * *.
Nor would Does compliance with the subpoena implicitly authenticate the
calendar; his production is not a necessary link to incriminating evidence contained
in [it]. * * * *. The government could authenticate the calendar, either in the grand
jury or at trial, simply by establishing Does prior production of the copy to the SEC
and asking the trier of fact to compare the copy and the original. Such a comparison,
considered in light of Does SEC testimony regarding his use of the calendar, would
leave no doubt that the calendar was that described in the subpoena.
Accordingly, because Does compliance with the subpoena would require
mere surrender of the calendar, and not testimony, Doe has no act of production
privilege. See Fisher * * * *.
In United States v. Hubbell,1419 the special prosecutor investigating virtually anything
criminal President Clinton did or his cronies might be associated with (or perhaps even dreamed or
thought about), fixed on the infamous Webster Hubbell, former presidential Little Rock crony and
deputy attorney general. As a tool to get to the president, the special prosecutor investigated
Hubbells potential nontax crimes. The hapless Hubbell plead guilty to those nontax crimes. In
1419
530 U.S. 27 (2000).
- 580 -
doing so, he promised to provide the special prosecutor information against President Clinton.
Subsequently, the special prosecutor instituted a grand jury investigation of whether Hubbell had
complied with his promise. The special prosecutor had the grand jury issue broadly worded grand
jury subpoenae for a number of categories of financial records. Hubbell appeared before the grand
jury and invoked his Fifth Amendment privilege. The prosecutor thereupon delivered to Hubbell
an immunity order from the district court ordering him to comply and granting immunity to the
extent allowed by law. The immunity is referred to as derivative use immunity, meaning that, if
the Government subsequently prosecutes the person, the Government must show that the prosecution
is based on information other than the testimonial information it obtained only by the grant of
immunity. Hubbell then produced over 13,000 pages of documents. From the documents thus
produced, the special prosecutor obtained an indictment of Mr. Hubbell for tax crimes and mail and
wire fraud. The Government admitted that it could not prove that, without the compulsion, it knew
of the documents with reasonable particularity; based on that admission, the parties agreed that the
charges would be dropped altogether if the Act of Production doctrine would be a significant bar
to prosecution. In that posture, the Supreme Court granted certiorari at the request of the special
prosecutor to determine the precise scope of a grant of immunity with respect to the production of
documents in response to a subpoena.
The Court started by repeating the distinctions that have been recognized establishing the
parameters of the problem:
The word witness in the constitutional text limits the relevant category of
compelled incriminating communications to those that are testimonial in character.
As Justice Holmes observed, there is a significant difference between the use of
compulsion to extort communications from a defendant and compelling a person to
engage in conduct that may be incriminating. Thus, even though the act may provide
incriminating evidence, a criminal suspect may be compelled to put on a shirt, to
provide a blood sample or handwriting exemplar, or to make a recording of his voice.
The act of exhibiting such physical characteristics is not the same as a sworn
communication by a witness that relates either express or implied assertions of fact
or belief. * * * * Similarly, the fact that incriminating evidence may be the byproduct
of obedience to a regulatory requirement, such as filing an income tax return,
maintaining required records, or reporting an accident, does not clothe such required
conduct with the testimonial privilege.
The Court then reasoned, consistent with the Act of Production Doctrine that:
The compelled testimony that is relevant in this case is not to be found in
the contents of the documents produced in response to the subpoena. It is, rather, the
testimony inherent in the act of producing those documents. The disagreement
between the parties focuses entirely on the significance of that testimonial aspect.
The Court then summarized the special prosecutors argument that the Act of Production did
not apply as follows:
- 581 -
The Government correctly emphasizes that the testimonial aspect of a

response to a subpoena duces tecum does nothing more than establish the existence,
authenticity, and custody of items that are produced. We assume that the
Government is also entirely correct in its submission that it would not have to advert
to respondents act of production in order to prove the existence, authenticity, or
custody of any documents that it might offer in evidence at a criminal trial; indeed,
the Government disclaims any need to introduce any of the documents produced by
respondent into evidence in order to prove the charges against him. It follows,
according to the Government, that it has no intention of making improper use of
respondent s compelled testimony.
The Court then rejected the argument as follows:
The question, however, is not whether the response to the subpoena may be
introduced into evidence at his criminal trial. That would surely be a prohibited use
of the immunized act of production. * * * But the fact that the Government intends
no such use of the act of production leaves open the separate question whether it has
already made derivative use of the testimonial aspect of that act in obtaining the
indictment against respondent and in preparing its case for trial. It clearly has. It is
apparent from the text of the subpoena itself that the prosecutor needed respondents
assistance both to identify potential sources of information and to produce those
sources. * * * * Given the breadth of the description of the 11 categories of
documents called for by the subpoena, the collection and production of the materials
demanded was tantamount to answering a series of interrogatories asking a witness
to disclose the existence and location of particular documents fitting certain broad
descriptions. The assembly of literally hundreds of pages of material in response to
a request for any and all documents reflecting, referring, or relating to any direct or
indirect sources of money or other things of value received by or provided to an
individual or members of his family during a 3-year period, Appendix, infra, at 19,
is the functional equivalent of the preparation of an answer to either a detailed
written interrogatory or a series of oral questions at a discovery deposition. Entirely
apart from the contents of the 13,120 pages of materials that respondent produced in
this case, it is undeniable that providing a catalog of existing documents fitting
within any of the 11 broadly worded subpoena categories could provide a prosecutor
with a lead to incriminating evidence, or a link in the chain of evidence needed
to prosecute.
****
* * * we cannot accept the Government s submission that respondents
immunity did not preclude its derivative use of the produced documents because its
possession of the documents [was] the fruit only of a simple physical actthe act
of producing the documents. Id., at 29. It was unquestionably necessary for
respondent to make extensive use of the contents of his own mind in identifying
- 582 -
the hundreds of documents responsive to the requests in the subpoena. * * * * The

assembly of those documents was like telling an inquisitor the combination to a wall
safe, not like being forced to surrender the key to a strongbox. Id., at 210, n. 9. The
Governments anemic view of respondent s act of production as a mere physical act
that is principally non-testimonial in character and can be entirely divorced from its
implicit testimonial aspect so as to constitute a legitimate, wholly independent
source (as required by Kastigar) for the documents produced simply fails to account
for these realities.
In sum, we have no doubt that the constitutional privilege against
self-incrimination protects the target of a grand jury investigation from being
compelled to answer questions designed to elicit information about the existence of
sources of potentially incriminating evidence. That constitutional privilege has the
same application to the testimonial aspect of a response to a subpoena seeking
discovery of those sources.
The Court distinguished an earlier case (Fisher v. United States, 425 U.S. 391(1976)) where
it had rejected the Fifth Amendment because there the Government already knew of the existence
of the specific documents in question. Where, as in Hubbell, the government is just out on a fishing
expedition, the Act of Production applies if the Government lands the big one. In this respect, the
Court specifically rejected the notion that a mere assumption as to the existence of the type of
records will cure the defect. This potentially offers a lot of opportunity for the potential application
of the Act of Production doctrine.
An interesting concurrence by Justice Thomas, joined by Justice Scalia, questioned much
of the Supreme Court jurisprudence leading to the Act of Production doctrine. As recounted above,
that jurisprudence permits the assertion of the Fifth Amendment only where there is compulsion and
something testimonial about the compulsion required. That jurisprudence thus permitted the
Government to force the production of documents and protected only the testimonial aspects of the
compulsion. That was the jurisprudence the majority applied in reaching its decision. Justice
Thomas, with Justice Scalia, suggested that this jurisprudence may be wrong, in that Fifth
Amendment should protect a putative defendant from having to produce incriminating documents
whether or not the act of production was itself testimonial. The parties, however, had not asked the
Court to re-examine the issue. And all agreed that Hubbell should prevail. Nevertheless, Justice
Thomas and Justice Scalia stated specifically that they would be open for reconsideration of that
jurisprudence.
- 583 -
Returning to the Act of Production doctrine, note that, if the Government wanted to obtain
the documents by search warrant rather than subpoena (or, in the case of an IRS investigation, by
a summons), the Government would have to show probable cause and describe the documents to be
seized with reasonable particularity.1420 The subpoena (or IRS summons) requires neither probable
cause nor, perhaps, the degree of particularity required for a search warrant. The Courts insistence
in Hubbell and its predecessors (including In re Grand Jury included above) upon some prosecution
knowledge of the existence of the records is perhaps an analog to the particularity requirement for
search warrants in order to prevent the subpoena or summons process to turn into fishing expeditions
in criminal investigations.
What level of knowledge of existence of the documents is required to support compulsory
production by subpoena or its administrative counterpart, the IRS summons? In a recent case,1421
the IRS had instituted a much heralded initiative to discover foreign bank accounts by issuing John
Doe summonses to credit card processing agencies within the United States who would have records
of processed charges for foreign bank accounts. From those records, the IRS obtained evidence that
a particular taxpayer, the taxpayer- defendant in this summons enforcement proceeding, had a
foreign credit card, The IRS issued the summons for the taxpayers bank and credit card records and
related documents. The taxpayer appeared pursuant to the summons and asserted privileges. The
Government then brought the summons enforcement proceeding and requested that the Court also
issue an order requiring compliance with a consent directive directing the offshore bank to disclose
information to the IRS. In the affidavit in support of the summons (recall that such an affidavit is
used to meet the Powell requirements in the summary summons enforcement proceeding), the IRS
Agent recounted the following: (i) the taxpayer had a foreign bank account with two associated
credit cards; (ii) the bank account number for that account; and (iii) the taxpayer had answered no
to the foreign bank account question on Schedule B of his 1040.
One of the taxpayers defenses to compliance was the Hubbell defense. The district court
and the court of appeals rejected the defense on the basis that the information the IRS already had
made the existence of the foreign bank account virtually a foregone conclusion, sufficient to meet
Hubbells requirements. The court of appeals reasoned:
The existence of the requested records relating to Norwood's [foreign bank
credit] cards and [related foreign bank] account is a foregone conclusion. The
summons seeks records such as account applications, periodic account statements,
and charge receipts, all of which are possessed by the owners of financial accounts
as a matter of course. Norwood does not contend that he does not possess any of
these documents, and the government knows far more about the documents
associated with Norwood's [foreign bank] cards and account than it did about the
defendant's business records in Hubbell. 530 U.S. at 44. In Hubbell, the government
could not show "any prior knowledge of either the existence or whereabouts of the
1420
FRCrP 41(d) (probable cause), which really is a Fourth Amendment requirement.

See Zurcher v Stanford Daily 436 US 547 (1978); and Weeks v. United States, 232 U.S. 383, 393-4
(1914) ("reasonable particularity").
1421
United States v. Norwood, 420 F.3d 888 (8th Cir. 2005).
- 584 -
documents sought. Id. (emphasis added). Here, by contrast, the government knows
the name and location of the bank that created the records sought, Norwood's
payment card numbers, and even the details of a number of discrete transactions
involving the cards and his [foreign bank] account. Accordingly, the district court's
conclusion that Norwood's production of the records has no testimonial
significance, is not clearly erroneous.1422
United States v. Ponds, 454 F.3d 313 (D.C. Cir. 2006) addressed some of the issues left open
by Hubbell in holding that the Fifth Amendment was implicated in a compelled document
production. Focusing on the spectrum usually encountered between the frames of the two cases
Fisher where the documents were reasonably known to exist (no Fifth Amendment privilege) and
Hubble where the Government was just fishing (Fifth Amendment privilege) the court said (pp.
320-321):
Although the Supreme Court did not adopt the reasonable particularity standard
in affirming our decision, it emphasized that the applicability of the Fifth
Amendment turns on the level of the government's prior knowledge of the existence
and location of the produced documents. See Hubbell, 530 U.S. at 44-45.
Post-Hubbell, another circuit has applied the reasonable particularity standard to
determine whether an act of production is sufficiently testimonial to implicate the
Fifth Amendment. See In re Grand Jury Subpoena Dated April 18, 2003, 383 F.3d
905, 910 (9th Cir. 2004). Because that standard conceptualizes the Supreme Court's
focus in a useful way, so do we.
The Ponds court found that, under the facts, the prosecutors did not have the required particularity
of knowledge as to some of the documents and, accordingly, that Ponds had a Fifth Amendment
right to not produce the documents. As is sometimes the case where the subpoenaed party properly
asserts a Fifth Amendment privilege, the prosecutors in Ponds obtained an immunity order and, as
in Hubbell, the immunity order is ultimately what propelled the issue forward when the taxpayer
claimed, in effect, that, because his Fifth Amendment privilege was implicated, the prosecutors used
the testimony thus compelled in a way not permitted by the grant of immunity.
Reasonable particularity as to what? Is it the level of reasonable particularity to support a
search warrant. I am not sure that the imperatives of the Fifth Amendment guarantee against self
incrimination are coterminous with the imperatives of the Fourth Amendment. Go back to Hubbell
where the Court asked a more particular type of particularity than required for a search warrant. The
Ninth Circuit had previously decided a case on a Ponds-type reasonable particularity analysis, and
the Eleventh Circuit recently agreed.1423
1422
Id. At 895-896.
In re Grand Jury Subpoena, Dated Apr. 18, 2003, 383 F.3d 905 (9th Cir. 2004); and
In re Grand Jury Subpoena Duces Tecum Dated March 25, 2011, 670 F.3d 1335, 1344 n. 20 (11th
Cir. 2012) (citing both Ponds and In re Grand Jury Subpoena, Dated April 18, 2003, 383 F.3d 905,
910 (9th Cir. 2004). See generally Mark A. Cowen, The Act-of-Production Privilege Post-Hubbell:
United States v. Ponds and the Relevance of the "Reasonable Particularity" and "Foregone
1423
- 585 -
Another Court, the Eighth Circuit recently focused back on the foregone conclusion
requirement without mentioning the reasonable particularity standard and said:
For this foregone conclusion exception to apply, the government must establish its
independent knowledge of three elements: the documents' existence, the documents'
authenticity and respondent's possession or control of the documents. See United
States v. Hubble, 530 U.S. 27, 40-41 (2000). The government bears the burden of
proof and must have had the requisite knowledge before issuing the summons or
subpoena. See In re Grand Jury Subpoena, 383 F.3d at 910.1424
At least arguably, as articulated, this might be a tighter standard of particularity than in the search
warrant context. Still, I have to ask the question of whether a tighter standard would just force the
Government to obtain a search warrant. Certainly, in at least some of these cases, the Government
had enough evidence to obtain a search warrant. It seems to me to be somewhat counterproductive
to permit the Government to obtain by search warrant that which it cannot obtain by subpoena, but
again the imperatives of the Fifth Amendment and the Fourth Amendment are not coterminous.1425
A common context for the potential application of the Act of Production doctrine applies
when entity records are summonsed or subpoenaed. Obviously, the entity itself has not Fifth
Amendment privilege, but the custodian of the records may have a Fifth Amendment privilege. As
in Hubbell, the act of compiling records complying with a compulsory process and producing them
may have certain testimonial features. The Supreme Court addressed this issue in Braswell v.
United States, 487 U.S. 99 (1988):1426
We note further that recognizing a Fifth Amendment privilege on behalf of
the records custodians of collective entities would have a detrimental impact on the
Government's efforts to prosecute white-collar crime, one of the most serious
problems confronting law enforcement authorities. The greater portion of evidence
of wrongdoing by an organization or its representatives is usually found in the
official records and documents of that organization. Were the cloak of the privilege
to be thrown around these impersonal records and documents, effective enforcement
of many federal and state laws would be impossible. If custodians could assert a
privilege, authorities would be stymied not only in their enforcement efforts against
those individuals but also in their prosecutions of organizations. In view of the
inescapable fact that an artificial entity can only act to produce its records through
its individual officers or agents, recognition of the individual's claim of privilege
with respect to the financial records of the organization would substantially
undermine the unchallenged rule that the organization itself is not entitled to claim
Conclusion" Doctrines, 17 Geo. Mason L. Rev. 863 (2010).

1424
United States v. Bright, 596 F.3d 683, 692 (9th Cir. 2010).
1425
See United States v. Hubbell, 530 U.S. 27, 56 n.6 (2000) (Thomas, J., concurring).
1426
Footnotes, some internal quotes and case citations omitted for readability.
- 586 -
any Fifth Amendment privilege, and largely frustrate legitimate governmental

regulation of such organizations.
Petitioner suggests, however, that these concerns can be minimized by the
simple expedient of either granting the custodian statutory immunity as to the act of
production, 18 U. S. C. 6002, 6003, or addressing the subpoena to the corporation
and allowing it to chose an agent to produce the records who can do so without
incriminating himself. We think neither proposal satisfactorily addresses these
concerns. Taking the last first, it is no doubt true that if a subpoena is addressed to
a corporation, the corporation must find some means by which to comply because
no Fifth Amendment defense is available to it. The means most commonly used to
comply is the appointment of an alternate custodian. But petitioner insists he cannot
be required to aid the appointed custodian in his search for the demanded records,
for any statement to the surrogate would itself be testimonial and incriminating. If
this is correct, then petitioner's solution is a chimera. In situations such as this -where the corporate custodian is likely the only person with knowledge about the
demanded documents -- the appointment of a surrogate will simply not ensure that
the documents sought will ever reach the grand jury room; the appointed custodian
will essentially be sent on an unguided search.
This problem is eliminated if the Government grants the subpoenaed
custodian statutory immunity for the testimonial aspects of his act of production. But
that solution also entails a significant drawback. All of the evidence obtained
under a grant of immunity to the custodian may of course be used freely against the
corporation, but if the Government has any thought of prosecuting the custodian, a
grant of act of production immunity can have serious consequences. Testimony
obtained pursuant to a grant of statutory use immunity may be used neither directly
nor derivatively. 18 U. S. C. 6002; Kastigar v. United States, 406 U.S. 441 (1972).
And one raising a claim under the federal immunity statute need only show that he
testified under a grant of immunity in order to shift to the government the heavy
burden of proving that all of the evidence it proposes to use was derived from
legitimate independent sources. Even in cases where the Government does not
employ the immunized testimony for any purpose -- direct or derivative -- against the
witness, the Government's inability to meet the heavy burden it bears may result
in the preclusion of crucial evidence that was obtained legitimately.
Although a corporate custodian is not entitled to resist a subpoena on the
ground that his act of production will be personally incriminating, we do think
certain consequences flow from the fact that the custodian's act of production is one
in his representative rather than personal capacity. Because the custodian acts as a
representative, the act is deemed one of the corporation and not the individual.
Therefore, the Government concedes, as it must, that it may make no evidentiary use
of the individual act against the individual. For example, in a criminal prosecution
against the custodian, the Government may not introduce into evidence before the
- 587 -
jury the fact that the subpoena was served upon and the corporation's documents
were delivered by one particular individual, the custodian. The Government has the
right, however, to use the corporation's act of production against the custodian. The
Government may offer testimony -- for example, from the process server who
delivered the subpoena and from the individual who received the records -establishing that the corporation produced the records subpoenaed. The jury may
draw from the corporation's act of production the conclusion that the records in
question are authentic corporate records, which the corporation possessed, and which
it produced in response to the subpoena. And if the defendant held a prominent
position within the corporation that produced the records, the jury may, just as it
would had someone else produced the documents, reasonably infer that he had
possession of the documents or knowledge of their contents. Because the jury is not
told that the defendant produced the records, any nexus between the defendant and
the documents results solely from the corporation's act of production and other
evidence in the case. n11
n11 We reject the suggestion that the limitation on the evidentiary use of the
custodian's act of production is the equivalent of constructive use immunity barred
under our decision in Doe, 465 U.S., at 616-617. Rather, the limitation is a necessary
concomitant of the notion that a corporate custodian acts as an agent and not an
individual when he produces corporate records in response to a subpoena addressed
to him in his representative capacity.
[Continuation of footnote] We leave open the question whether the agency
rationale supports compelling a custodian to produce corporate records when the
custodian is able to establish, by showing for example that he is the sole employee
and officer of the corporation, that the jury would inevitably conclude that he
produced the records.
I turn in the next section to immunity which is animated by the Fifth Amendment privilege.
I do want to make clear the whole point of this analysis that the contents of documents, although
not privileged per se by current Fifth Amendment analysis, can get the benefits of privilege via the
act of production doctrine. In other words, the safety net given by the act of production doctrine also
protects the contents of the documents simply because the Government cannot get to the contents
except through an act of production which implicates the Fifth Amendment. Hubbell and Ponds thus
held that, having obtained the documents by immunity after the party properly asserted their Fifth
Amendment privilege under the act of production doctrine, the prosecutors could not use the
contents of the documents despite the fact that the contents of the documents were per se not subject
to the Fifth Amendment privilege.
Finally, practitioners should be aware of the required records exception that, when
applicable, will trump the Fifth Amendment Act of Production doctrine. The required records
doctrine is variously formulated, perhaps because of its tenuous logic in view of contemporary Fifth
Amendment jurisprudence. Here is perhaps a reasonable recent statement of the rule and its
predicates in a tax setting:
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However, there is an important exception to the communicative aspects

doctrine when the documents in question are required records. In re Two Grand
Jury Subpoenae Duces Tecum, 793 F.2d 69, 73 (2d Cir.1986) ([T]he [required
records] exception overrides the privilege against self-incrimination in situations in
which the privilege would otherwise apply; that is, even if the compelled act of
producing the required records might be testimonial and incriminating.). To
constitute "required records," documents must satisfy a three-part test. In re Doe, 711
F.2d 1187, 1191 (2d Cir.1983) (quoting Grosso v. United States, 390 U.S. 62, 67-68
(1968)). (1) [T]he requirement that they be kept must be essentially regulatory, (2)
the records must be of a kind which the regulated party has customarily kept, and
(3) the records themselves must have assumed 'public aspects' which render them
analogous to public documents. Id. Courts in the Second Circuit have held that
required documents include W-2 forms, 1099 statements, tax returns, and
employee earnings statements. United States v. Barile, No. 1:06mc137 (LEK/RFT),
2007 U.S. Dist. LEXIS 84393, 2007 WL 3534261, at *3 (N.D.N.Y. Nov. 13, 2007);
see also In re Doe, 711 F.2d at 1191 (We have little difficulty applying the required
records exception to the W-2 and Schedule II prescription forms.); United States v.
Edgerton, 734 F.2d 913, 918 (2d Cir.1984) (There is precedent for holding that W-2s
and Forms 1099 are required records.). Those are among the documents the IRS
seeks from Mr. Whitehouse.1427
I offer this for what it may be worth. The required records exception is often criticized because its
stated underpinnings are inconsistent with the Fifth Amendment: If the subpoenaed or summonsed
party has a Fifth Amendment privilege under the act of production concept, why should it matter that
the documents may be required records for some administrative scheme?1428
You will recall that there is a general Code and Regulations requirement that the taxpayer
keep records sufficient to calculate and report his or her tax obligations.1429 Does this mean that all
of the taxpayers records relevant to tax liabilities are required records?1430 Fortunately, the
Government has not pressed that argument, so the cases have not had to deal with it except
episodically for certain types of documents e.g., Forms W-2 and 1099 as mentioned in the quote.
1427
United States v. Whitehouse, 2010 U.S. Dist. LEXIS 122979 (D. Conn. 2010).
See e.g., Akhil Reed Amar and Renee B. Lettow, Fifth Amendment First Principles:
The Self-Incrimination Clause, 93 Mich. L. Rev. 857, 869-873(1995) (noting the logical
inconsistency and the ad hoc and inconsistent holdings in the cases); but see Michael J. Zydney
Mannheimer, Toward a Unified Theory of Testimonial Evidence Under the Fifth and Sixth
Amendments, 80 Temp. L. Rev. 1135, 1181 (2007) (The best reading of these cases is that the
Court utilizes this consideration to determine whether, at the time of compulsion, it was the
government's objective purpose to create evidence for a potential criminal proceeding.).
1429
6000 and underlying regulations.
1430
See Shapiro v. United States, 335 U.S. 1, 51 (1948) (Frankfurter, J., dissenting) (If
records merely because required to be kept by law ipso facto become public records, we are indeed
living in glass houses.)
1428
- 589 -
I cant predict where this might go if the Government were to get more aggressive. Maybe the
courts would embrace the idea, but also maybe they would rethink the required records exception
altogether.
One recent tax crimes related context for the Government assertion of the required records
exception to the Fifth Amendment is for the records required to be maintained with respect to the
FBAR reporting obligations. The regulations underlying the statute require the maintenance of
records.1431 The Government has issued several subpoenas to at least one identified U.S. depositor
in foreign financial institutions to produce the records described in those regulations. Although
there were some inconsistent results at the trial level, three Courts of Appeals have now held
consistently that, for the required records doctrine applies to require these FBAR required records
over the taxpayers claim of Fifth Amendment privilege via the act of production.1432
c.
Immunity.
(1)
Types of Immunity.
(a)
Transactional Immunity.
Transactional immunity is complete immunity. There is no statutory basis for transactional

immunity; hence, it must be obtained by agreement or not at all. This is the best form of immunity,
and is rarely obtained in the federal system (except sometimes through prosecutor error). Here, the
terms of the contract are critical.
To use an example, lets say that the witness is a taxpayer who, along with others, had a
common plan (conspiracy) to evade their taxes and that the prosecution against the taxpayer could
be brought in at least two districts and, depending upon the facts, perhaps in more districts.
Nevertheless, the investigation is centered in one of the districts, and the prosecutor thinks that he
needs the witness testimony to nail the others who he feels are more culpable in the scheme. The
witness lawyers opening position is that the witness must have transactional immunity as to stated
crimes and all crimes that may be derived from his clients information. The prosecutor will resist,
insisting that he has no authority to grant that form of immunity. He will say, for example, that his
U.S. Attorney does not allow it, so that it is a non-starter. Lets assume that, due to the unique facts
of the case, the prosecutor then determines that the witness testimony is indeed critical to the
prosecution he desires to make and therefore is willing to grant transactional immunity. (This is a
critical assumption because the facts would have to be unusual indeed for the prosecutor to grant the
broader immunity when he can force more limited statutory immunity discussed below.) In that
event, so long as the witness performs his obligations under the contract, the witness will have the
transactional immunity conferred by agreement. But at least think about how to make that
1431
31 C.F.R. 103.32 and .24.

In re M.H., 648 F.3d 1067, 1079 (9th Cir. 2011); In re Special Feb. 2011-1 Grand
Jury Subpoena Dated Sept. 12, 2011, No. 11-3799, 691 F.3d 903 (7th Cir. 2012), pet. for reh. and
reh. en banc denied, 2012 U.S. App. 22388 (7th Cir. 2012); In Re: Grand Jury Subpoena, 696 F.3d
428 (5th Cir. 2012).
1432
- 590 -
agreement binding on other U.S. Attorneys than the district in which the prosecutor acts as an
AUSA.
(b)
Derivative Use Immunity.
This is the mid-way point, and, as we see from the Kastigar discussion later in this section,
is conceptualized as co-extensive with the Fifth Amendment privilege. The Fifth Amendment
privilege may, as noted above, be asserted as to testimony that is not only itself incriminating but
that might lead to incriminating information. This type of immunity prevents the prosecutor from
using (i) the testimony given and (ii) any leads developed from the testimony. This type of immunity
is called derivative use immunity, because of the latter feature. (Immunity offering only use of
the testimony given is called use immunity and is more limited than derivative use immunity.) This
type of immunity may be obtained both by statute or by agreement between the witness and the
prosecutor.
Derivative use immunity is sometimes referred to as use and derivative use immunity in
order to reinforce that it covers use immunity also I use the shorter form derivative use immunity
for it always entails use immunity, to which we now turn.
(c)
Use Immunity.
From the defendants perspective, this is the worst form of immunity and, correspondingly,
from the prosecutors perspective, the best if immunity has to be given at all. This form of immunity
prohibits use of the testimony given . It does not prohibit use of leads derived from the testimony.
Because of significant prosecutorial limitations on derivative use immunity, if the prosecutor is
inclined to offer immunity at all, it will usually be use immunity. Statutory immunity is derivative
use immunity, so use immunity is available only by agreement with the prosecutor. Please review
at this point discussion of negotiating plea agreements and proffers at p. 389. In those materials, you
will see that FRE Rule 410(3) grants a type of use immunity but the example proffer letter from the
United States Attorney for the Southern District of New York limits by contract even those benefits.
DOJ Tax confers by policy statement a type of use immunity for vicarious admissions
made by an attorney for a person under consideration for tax indictment. In order to encourage
effective conferences and free-flowing dialog in the DOJ Tax consideration of recommendations for
tax indictments, DOJ Tax commits to attorneys representing targets that it will not use admissions
by the attorney against the client.1433
1433
Tax Division Directive No. 86-58, in CTM 3.00 (2008 ed.); and USAM 6-4.214.
This is like a form of use immunity, but the USAM states that leads from an attorneys statements
may be used against the represented party.
- 591 -
(2)
Statutory Immunity.
(a)
Statutory Immunity - Government Option.
18 U.S.C. 6002 and 6003 provide a method for the prosecutor to obtain a court or
administrative agency order conferring derivative use immunity that forces a witness to testify. The
Fifth Amendment privilege against self incrimination issue is avoided by conferring immunity that
assures no testimony or other information compelled under the order (or any information directly
or indirectly derived from such testimony or other information) may be used against the witness in
any criminal case, except a prosecution for perjury, giving a false statement, or otherwise failing to
comply with the order.1434 This statutory immunity is derivative use immunity.1435
In court proceedings, this statute is invoked upon application of the U.S. Attorney for the
district to the district court which shall issue an immunity order;1436 in agency proceedings, the
Attorney General must approve an immunity order issued by the agency.1437 In each case, the
application must certify that the information thus immunized necessary to the public interest and
that the person has refused or is likely to refuse to testify based on the Fifth Amendment
privilege.1438
I dont dwell here on statutory immunity because it is only rarely used and pretty much
outside the control of the lawyer for the witness. Although I dont deal with statutory immunity in
greater detail, I do note that key cases in the Fifth Amendment analysis most importantly Hubbell
arose in the context of grants of statutory immunity and the derivative use limitation of the
prosecutors use of the compelled testimony as a result of grant of statutory immunity.
(b)
Statutory Immunity - Defense Request.
The foregoing deals with situations where the prosecutors need the confer immunity to obtain
testimony. Normally, we would expect that the prosecutors would exercise it discretion to seek
immunity wisely and in the interests of justice. It should be at least conceivable that the interests
of justice might be served if the recalcitrant witness has testimony that could help the defendant.
Will the prosecutors then confer immunity to offer the defense this important tool? Or, to state it
1434
18 U.S.C. 6002.
In In re: Grand Jury Subpoena Duces Tecum Dated March 25, 2011, 670 F.3d 1335
(11th Cir. 2012), at the U.S. Attorneys request, the judge limited the grant of statutory immunity
to use immunity. The Eleventh Circuit reversed, holding that statutory immunity had to be
coextensive with the Fifth Amendment privilege, which required derivative use immunity.
1436
18 U.S.C. 6003(a).
1437
18 U.S.C. 6004(a).
1438
18 U.S.C. 6993(b) and 6884(c).
1435
- 592 -
another way, would the prosecutors refuse a request to immunize the testimony of a third party
witness in order to gain a tactical advantage in its quest to convict the defendant?1439
The prosecutors' refusal to grant statutory immunity could tilt what should be a relatively
level playing field in favor of the prosecutors.1440 The conventional wisdom, discussed below, is that
the prosecutors cannot be compelled to confer statutory immunity.
There is a potential attack on prosecutors' intransigence. The defense could move the court
to order the Government to confer statutory immunity under 18 USC Section 6003, on the ground
that its refusal to do so is, under the circumstances, improper, rising to the level of a due process
violation or even exercise an inherent due process inspired authority to itself enter the immunity
order without the request of the prosecutor.1441 In the leading case, the Third Circuit reasoned:1442
Grant of judicial immunity impact most directly on the government's decision to
prosecute and on the manner of its prosecution. Frequently, the government will have
a legitimate interest in prosecuting the very witness whom the defendant seeks to
immunize. But this does not mean that no accommodation can be reached between
the government's interest as prosecutor and the defendant's constitutional right to
present an effective and entire case. In many instances, use immunity, which was all
that was sought here and is all that is constitutionally required, Kastigar v. United
States, 406 U.S. 441 (1972), is virtually costless to the government. For example, the
government may have already assembled all the evidence necessary to prosecute the
witness independent of the witness' testimony. Or the government may be able to
"sterilize" the testimony of the immunized witness and so isolate it from any future
testimony of the witness that it would not trench upon any of the witness'
constitutional rights if he were subsequently to be prosecuted. See Kastigar v. United
States, supra. Finally, the government may seek a postponement of the defendant's
trial so that it may complete its investigation of the defense witness who is the
subject of an immunity application. While these options are not intended to be all
1439
One legitimate motive the prosecution might have would be to avoid a Kastigar
hearing (discussed below) in the even the then immunized witness is later prosecuted. See United
States v. Whiteford, 676 F.3d 348, 363 n. 13 (3d Cir. 2012),
1440
See generally Reid H. Weingarten and Brian M. Heberlig, The Defense Witness
Immunity Doctrine: The Time has Come to Give it Strength to Address Prosecutorial Overreaching,
43 Am. Crim. L. Rev. 1189 (2006) (noting "A disturbing trend in federal white collar crime
prosecutions is the government's manipulation of immunity grants and charging decisions to make
exculpatory witnesses unavailable to the defendant at trial.").
1441
This theory was first recognized in Government of Virgin Islands v. Smith, 615 F.
2d 964, 971-2 (3d Cir. 1980) (noting that the constitutional violation "the same as the violation
found in the Chambers and Brady genre of cases i. e., depriving a defendant of clearly exculpatory
evidence necessary to present an effective defense."); see also United States v. Whiteford, 676 F.3d
348, 363-364 (3d Cir. 2012); and United States v. Lord, 711 F.2d 887 (9th Cir. 1983).
1442
Government of Virgin Islands v. Smith, 615 F. 2d 964, 973-4 (3d Cir. 1980).
- 593 -
inclusive, if any of these options are available to the government, then it would
appear to us that the government would have no significant interests which
countervail the defendant's due process rights. Any interest the government may have
in withholding immunity in such a situation would be purely formal, possibly suspect
and should not, without close scrutiny, impede a judicial grant of immunity.
On the other hand, where the government either rebuts the defendant's
showing or establishes that the public interest would be disserved by a grant of
immunity to a defense witness or that such a grant would entail significant costs to
it, it would be appropriate for the immunity application to be denied. In either event,
whether it grants or denies the application, the district court should be careful to
explain the basis of its ruling. We hold that, in cases where the government can
present no strong countervailing interest, a court has inherent authority to immunize
a witness capable of providing clearly exculpatory evidence on behalf of a defendant
who has met our stated conditions.
Although the Third Circuit approved this limited right, courts are quite reluctant to grant
such immunity in the absence of a voluntary request by the prosecutors. As the Second Circuit
recently reiterated, The situations in which the United States is required to grant statutory immunity
to a defense witness are few and exceptional.1443 Indeed, continued the Second Circuit, [s]o few
and exceptional are they that, in the nearly thirty years since establishing a test for when immunity
must be granted, we have yet to reverse a failure to immunize. And, continued the Second Circuit,
the right to this extraordinary benefit to the defense requires three findings which the defense must
establish:
(1) "[T]he government has engaged in discriminatory use of immunity to gain a
tactical advantage or, through its own overreaching, has forced the witness to invoke
the Fifth Amendment";
(2) "[T]he witness' testimony will be material, exculpatory and not cumulative"; and
(3) The testimony "is not obtainable from any other source."1444
In Ferguson, the Second Circuit found in the fact circumstances that the district court had not abused
its discretion.
In a factually unusual case, the Ninth Circuit posited that compelled immunity might be
required in the following circumstances:
We now hold that for a defendant to compel use immunity the defendant must show
that: (1) the defense witness's testimony was relevant; and (2) either (a) the
1443
United States v. Ferguson, 653 F.3d 61 (2d Cir. 2011), quoting United States v.
Praetorius, 622 F.2d 1054, 1064 (2d Cir. 1979).
1444
Id., p. 91, citing United States v. Burns, 684 F.2d 1066, 1077 (2d Cir. 1982).
- 594 -
prosecution intentionally caused the defense witness to invoke the Fifth Amendment
right against self-incrimination with the purpose of distorting the fact-finding
process; or (b) the prosecution granted immunity to a government witness in order
to obtain that witness's testimony, but denied immunity to a defense witness whose
testimony would have directly contradicted that of the government witness, with the
effect of so distorting the fact-finding process that the defendant was denied his due
process right to a fundamentally fair trial.1445
Despite the near knee jerk reaction to deny such defense requests, trial courts do occasionally
grant and appellate courts do affirm such requests.1446 If granted in the march to trial or during the
trial, the prosecutors may have limited opportunity to overcome the order, because, if reviewed at
all, it will be reviewed under the same abuse of discretion standard that forecloses relief in most
cases when defendants appeal a trial court denial of the defense request for an immunity order.1447
Given that there is a split in approaches among the Circuits, there is some possibility that the
Supreme Court may address the issue and at least bring some cohesion to the subject.1448
Finally, there is a further nuance. The issue was presented on petition for certiorari whether
a witness testimony given after the trial when he refused to give it for trial constitutes newly
discovered evidence under FRCrP Rule 33. 1449
1445
United States v. Straub, 538 F.3d 1147, 1162 (9th Cir. 2008).
See Nathaniel Lipanovich, Resolving the Circuit Split on Defense Immunity: How
the Prosecutorial Misconduct Test Has Failed Defendants and What the Supreme Court Should Do
About It, 91 Tex. L. Rev. 175 (2012).
1447
See e.g., In United States v. Nagle, 2011 U.S. App. LEXIS 17278 (3d Cir. 2011)
(nonprecedential), where the district court exercised its discretion to order immunity. The
prosecutors took an interlocutory appeal and sought writ of mandamus to overrule that district court
decision. The Nagle opinion does not offer any particular insight as to when a trial court's grant of
immunity is appropriate. Instead the Third Circuit affirmed based on the impropriety of appealing
such an order mid-stream in the trial level process. And, of course, it is nonprecedential. This means
that, in some cases, if the order is granted, the Government may have little practical choice but to
take this lump and move on.
1448
Nathaniel Lipanovich, Resolving the Circuit Split on Defense Immunity: How the
Prosecutorial Misconduct Test Has Failed Defendants and What the Supreme Court Should Do
About It, 91 Tex. L. Rev. 175 (2012).
1449
See Petition for Certiorari on Issue of Whether Defense Witness Invoking Fifth But
Offering Testimony After Conviction is Newly Discovered Evidence (Federal Tax Crimes Blog
11/14/12).
1446
- 595 -
(3)
Non-Statutory Immunity by Contract.
Non-statutory immunity is obtained by agreement rather than by the statute. The agreement
is effectively a contract between the compelled witness and the prosecutor.1450 Non-statutory
immunity is by far the more commonly used form of immunity. The negotiation for non-statutory
immunity is simply a contract negotiation. Given the stakes, of course, the negotiation requires the
most careful attention by practitioners. The IRS cannot use the non-statutory immunity, although
it might be estopped by the conduct of its agents if the facts indicated that assurances rising to the
level were given albeit without authority.
Non-statutory immunity involves the interplay between the Governments need for
information and the witnesss Fifth Amendment right not to provide incriminating information. The
drill is a negotiation to determine what the Government is willing to pay for the information. The
negotiation becomes a prototypical free-market negotiation what does the witness have (or what
does the Government think the witness has) that the Government is willing to pay for? The
Governments currency in this negotiation is its power to negotiate limitations upon its right or
ability to prosecute the witness. That negotiation, if successful, results in immunity. As I hope you
sense, that negotiation is a contract negotiation, although there is a form of enforced immunity
contract that the Government can get from a court.
The negotiations usually go like this (or some variation thereof): There will be some
preliminary posturing between the parties in which the witnesss lawyer insists that his client has
information (of uncertain precise content) that the Government needs badly (hence willing to pay
more), and the prosecutor insists that the witnesss information is important (otherwise they
wouldnt be talking) but not critical (hence, the Governments negotiating position is that it is
willing to pay less). The taxpayers lawyer may tantalize the prosecutor with certain portions of the
information in an off the record way to lead the prosecutor into thinking the Governments need is
greater (hence willing to pay more than initially offered). The negotiations then either fail, in which
case the Government can then either retreat to forced statutory immunity or forget information from
that witness, or an agreement is reached.
The terms of the contract are critical. The witnesss lawyer will want the broadest scope
possible (unequivocal transactional immunity) or, failing that (as is likely), the best possible use
immunity (preferably derivative use) and, if he is lucky, some loose language in the agreement that
could support an argument that even broader immunity was given. In any event, the writing, usually
in the form of a letter from the prosecutor acknowledged by the witness and his or her lawyer, sets
the terms of the contract. My experience is that, when an AUSA is willing to talk immunity, his or
her opening (and usually ending) offer is use immunity and then the negotiation is how limited that
use immunity really is, often specifically reserving the right to use the testimony for impeachment
1450
Because the immunity is contractual and relate to the prosecutions power and
discretion, they have been described as perfectly analogous to plea agreements. United States v.
Harvey, 869 F.2d 1439, 1450 (11th Cir. 1989) (Judge Clark, dissenting).
- 596 -
of a defense the witness might raise.1451 Still in appropriate cases, derivative use immunity can be
negotiated.1452 And, if there is doubt in the contract as to whether use or derivative use immunity
was conferred, derivative use immunity will be presumed.1453
Whatever the scope of the immunity granted, the prosecutor, usually not knowing precisely
what the witness has to offer, will want some out in the event the witness does not have the
information upon which the negotiations were predicated or does not cooperate or, worse still, lies
or misleads. That will usually be an explicit term of the contract, and should be negotiated if the
strength of the witnesss position permits. Often, as in the case of proffers at an early stage of the
investigation, the prosecutor is unlikely to offer anything more than a very strict and limited form
of use immunity.1454
An additional overlay to the immunity drill is that, usually in the federal system, the
negotiation takes place in a particular district with an AUSA who has no authority to bind the entire
federal system. Accordingly, the prosecutors starting negotiation is likely to be for immunity, in
whatever form, only for prosecutions in that particular district.1455 This may not be very comforting
to a witness whose potential criminal activity has touched more than that particular district. He or
she is not going to feel comforted without some assurance regarding the other districts. But, here
again, it becomes a negotiating issue how strong is the information the witness has (or the
Government thinks he has) and how many hoops is the Government willing to jump through to get
the information. Assurances from US Attorneys in other districts may be obtained and, sometimes,
even assurances from the various criminal sections of DOJ having the practical effect of providing
immunity throughout the country.1456
Just as contracts generally are not required to be in writing to be enforceable, so immunity
contracts may conceivably not be in writing. My anecdotal experience is that they are always let
me repeat that always in writing. While there may be some opportunity to prove and exploit an
unwritten agreement, my experience is that (1) the prosecutor almost invariably will initiate the
written agreement (often by a standard proffer letter)1457 and (2) rather than being able to anticipate
1451
See United States v. Mezzanatto, 513 U.S. 196, 207 (1995); and see the discussion
proffer letter from the Southern District of New York in the text beginning at p. 389.
1452
See e.g., United States v. Ramos, 537 F.3d 439 (5th Cir. 2008), where the contract
provided derivative use immunity.
1453
United States v. Plummer, 941 F.2d 799, 802 (9th Cir. 1991).
1454
United States v. Plummer, 941 F.2d 799, 802 (9th Cir. 1991).
1455
This precise point became an issue in United States v. Ramos,527 F.3d 439 (5th Cir.
2008) where, because the grant of immunity did not include other districts, the Court held that the
grant was not co-extensive with the Fifth Amendment privilege (as is statutory immunity which
covers all districts) and thus the witness had not waived his Fifth Amendment privilege.
1456
See generally Joel Cohen, The Many Different Kinds of Federal Immunity, NY LJ
(3/15/95).
1457
For an example from the Southern District of New York, see above in discussing
negotiating pleas and proffers at p. 389.
- 597 -
some benefit from uncertainty as to the scope of the agreement, it is better to get it in writing ab
initio so that everyone understands and is committed to the scope of the agreement in a way that is
readily provable.1458
Because the prosecutor usually confers this type of immunity via a letter (such as the proffer
letter referred to above), this type of immunity is often referred to as letter immunity. Other terms
used to describe this immunity are informal immunity and hip pocket immunity.1459 All of this
is meant to distinguish it from statutory immunity. My experience is that, almost invariably, the
immunity granted by this type of letter agreement is some variation of use immunity rather than the
derivative and use immunity granted by the statute. But, again, it depends upon the negotiating
leverage what does the person have to offer that might encourage the prosecutor to pay more.
As discussed earlier, for pre-existing documents, the Fifth Amendment privilege is limited
to the testimonial aspects of the act of production. The witness will usually be keenly interested in
asserting the act of production doctrine when the underlying documents (as to the contents of which
there is no Fifth Amendment privilege) are incriminating. Nevertheless, in those rare cases where
the witness is only keenly interested in protecting against the use of testimony inherent in the act of
production, counsel for the witness might request immunity as to the testimonial aspects of the act
of production. The Government might be more willing to grant that limited scope immunity.1460
Finally, I have assumed in this discussion that the negotiations are between the prosecutor
and the counsel for the witness. It is not conceivable that, from the Government side, a Government
agent other than a prosecutor might be involved in negotiations offering the benefit of immunity.
The question is whether the counsel for the witness can rely upon any such deal. It is one thing to
rely upon the prosecutor, who may not have any statutory authority to grant immunity, but is close
1458
See United States v. Harvey, 869 F.2d 1439 (11th Cir. 1989), for a good example of
the problems and perhaps the opportunities in uncertainty as to the scope of the agreement. The
Harvey court noted (p. 1443):
Informal grants of immunity are by their very nature less certain than formal grants,
and thus are much more likely to create confusion for the government and for the
courts in the future. As long as prosecutors continue the practice of unwritten grants
of immunity, they open the door for subsequent litigation such as this, and for
adverse decisions as well.
The context for Harvey may suggest that the Government usually suffers if there is unwritten
immunity, but I suggest that perhaps an equally significant danger is that the absence of a writing
may make the immunity the defendant may have thought he had unprovable and thus a mirage. For
this reason, I will trade certainty on the front end over uncertain ability to exploit uncertainty later
in the process.
1459
United States v. Harvey, 869 F.2d 1439, 1450 (11th Cir. 1989) (Clark, dissenting);
United States Attorneys Resource Manual, Title 9, Immunity 719.
1460
See e.g., IRM 9.6.1.5 (noting that an agency compulsion order approved by the
Attorney General may be used for this purpose and setting for the IRSs conditions for use of such
an immunity order).
- 598 -
enough to the charging process that a court would enforce the immunity granted. Reliance on others
elsewhere in the Government criminal enforcement apparatus is dicey indeed. No reasonable
defense counsel would rely upon an immunity deal he or she might strike with the IRS CI Special
Agent in a criminal investigation. That Special Agent may do something that otherwise might cause
a subsequent indictment to be dismissed, but it wont be because he or she had the authority to grant
immunity or because the defense counsel reasonably believed he or she had such authority.1461
(4)
Securing the Benefit of Immunity - Kastigar.
However the witness obtained immunity, the witness will want the benefit of the immunity.
Obviously, if the witness has transactional immunity (obtainable only by agreement), a breach of
the agreement can be easily spotted and policed. It is more difficult to spot breaches of derivative
use immunity and use immunity. What does the witness do if the Government prosecutes the
witness on the basis of evidence that the witness believes violates the immunity granted? In
conjunction with a bill of particulars, the taxpayer may want to invoke a pretrial hearing process
called a Kastigar hearing (named for the case upon which it is based, Kastigar v. United States,1462).
In Kastigar, the Supreme Court considered whether the United States Government may
compel testimony from an unwilling witness given use and derivative use immunity under the
immunity statute or, on the other hand, may be compelled only by conferring transactional
immunity.1463 The Court reasoned:
The constitutional inquiry, rooted in logic and history, as well as in the
decisions of this Court, is whether the immunity granted under this statute is
coextensive with the scope of the privilege. If so, petitioners refusals to answer
based on the privilege were unjustified, and the judgments of contempt were proper,
for the grant of immunity has removed the dangers against which the privilege
protects. * * * * If, on the other hand, the immunity granted is not as comprehensive
as the protection afforded by the privilege, petitioners were justified in refusing to
answer, and the judgments of contempt must be vacated. * * * *.
Petitioners draw a distinction between statutes that provide transactional
immunity and those that provide, as does the statute before us, immunity from use
1461
For this reason, the IRM is careful to warn IRS personnel that immunity can only be
granted consistent with the rules outlined IRM 9.4.5.12 Immunity and Compulsion Orders
(02-01-2005). Furthermore in settings where a subject or target of an IRS investigation might
otherwise infer that the deal being struck is immunity, the IRM is careful to note that it is not
immunity. The best example is the IRS voluntary disclosure practice, the practical effect of which
may be viewed as somewhat like immunity from prosecution. The IRM states explicitly that the
deal being struck will not guarantee immunity from prosecution. 9.5.11.9 Voluntary Disclosure
Practice (12-02-2009), at paragraph (2).
1462
406 U.S. 441 (1972).
1463
18 U. S. C. 6002-6003.
- 599 -
and derivative use. They contend that a statute must at a minimum grant full
transactional immunity in order to be coextensive with the scope of the privilege.
In support of this contention, they rely on Counselman v. Hitchcock, 142 U.S. 547
(1892), the first case in which this Court considered a constitutional challenge to an
immunity statute. * * * *.
[I omit the Courts discussion of Congressional enactment of transactional immunity
statute in reaction to Counselman.]
This transactional immunity statute became the basic form for the numerous
federal immunity statutes until 1970, when, after re-examining applicable
constitutional principles and the adequacy of existing law, Congress enacted the
statute here under consideration. The new statute, which does not afford [the]
absolute immunity against future prosecution referred to in Counselman, was
drafted to meet what Congress judged to be the conceptual basis of Counselman, as
elaborated in subsequent decisions of the Court, namely, that immunity from the
use of compelled testimony and evidence derived therefrom is coextensive with the
scope of the privilege.
The statutes explicit proscription of the use in any criminal case of
testimony or other information compelled under the order (or any information
directly or indirectly derived from such testimony or other information) is
consonant with Fifth Amendment standards. We hold that such immunity from use
and derivative use is coextensive with the scope of the privilege against
self-incrimination, and therefore is sufficient to compel testimony over a claim of the
privilege. While a grant of immunity must afford protection commensurate with that
afforded by the privilege, it need not be broader. Transactional immunity, which
accords full immunity from prosecution for the offense to which the compelled
testimony relates, affords the witness considerably broader protection than does the
Fifth Amendment privilege. The privilege has never been construed to mean that
one who invokes it cannot subsequently be prosecuted. Its sole concern is to afford
protection against being forced to give testimony leading to the infliction of
penalties affixed to . . . criminal acts. Immunity from the use of compelled
testimony, as well as evidence derived directly and indirectly therefrom, affords this
protection. It prohibits the prosecutorial authorities from using the compelled
testimony in any respect, and it therefore insures that the testimony cannot lead to
the infliction of criminal penalties on the witness.
Our holding is consistent with the conceptual basis of Counselman. The
Counselman statute, as construed by the Court, was plainly deficient in its failure to
prohibit the use against the immunized witness of evidence derived from his
compelled testimony. [Support from Counselman opinion omitted]
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The basis of the Courts decision was recognized in Ullmann v. United

States, 350 U.S. 422 (1956), in which the Court reiterated that the Counselman
statute was insufficient:
because the immunity granted was incomplete, in that it merely forbade the
use of the testimony given and failed to protect a witness from future
prosecution based on knowledge and sources of information obtained from
the compelled testimony. Id., at 437. (Emphasis supplied.)
* * * *. The broad language in Counselman relied upon by petitioners was
unnecessary to the Courts decision, and cannot be considered binding authority.
* * * *.
In Murphy v. Waterfront Commn, 378 U.S. 52 (1964), the Court carefully
considered immunity from use of compelled testimony and evidence derived
therefrom. The Murphy petitioners were subpoenaed to testify at a hearing
conducted by the Waterfront Commission of New York Harbor. After refusing to
answer certain questions on the ground that the answers might tend to incriminate
them, petitioners were granted immunity from prosecution under the laws of New
Jersey and New York. They continued to refuse to testify, however, on the ground
that their answers might tend to incriminate them under federal law, to which the
immunity did not purport to extend. They were adjudged in civil contempt, and that
judgment was affirmed by the New Jersey Supreme Court.
The issue before the Court in Murphy was whether New Jersey and New
York could compel the witnesses, whom these States had immunized from
prosecution under their laws, to give testimony that might then be used to convict
them of a federal crime. Since New Jersey and New York had not purported to
confer immunity from federal prosecution, the Court was faced with the question
what limitations the Fifth Amendment privilege imposed on the prosecutorial powers
of the Federal Government, a nonimmunizing sovereign. After undertaking an
examination of the policies and purposes of the privilege, the Court overturned the
rule that one jurisdiction within our federal structure may compel a witness to give
testimony which could be used to convict him of a crime in another jurisdiction.
The Court held that the privilege protects state witnesses against incrimination under
federal as well as state law, and federal witnesses against incrimination under state
as well as federal law. Applying this principle to the state immunity legislation
before it, the Court held the constitutional rule to be that:
[A] state witness may not be compelled to give testimony which may be
incriminating under federal law unless the compelled testimony and its fruits
cannot be used in any manner by federal officials in connection with a
criminal prosecution against him. We conclude, moreover, that in order to
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implement this constitutional rule and accommodate the interests of the State
and Federal Governments in investigating and prosecuting crime, the Federal
Government must be prohibited from making any such use of compelled
testimony and its fruits. n43 378 U.S., at 79.
n43 At this point the Court added the following note: Once a defendant
demonstrates that he has testified, under a state grant of immunity, to matters
related to the federal prosecution, the federal authorities have the burden of
showing that their evidence is not tainted by establishing that they had an
independent, legitimate source for the disputed evidence. Id., at 79 n. 18. If
transactional immunity had been deemed to be the constitutional rule there
could be no federal prosecution.
The Court emphasized that this rule left the state witness and the Federal
Government, against which the witness had immunity only from the use of the
compelled testimony and evidence derived therefrom, in substantially the same
position as if the witness had claimed his privilege in the absence of a state grant of
immunity. Ibid.
****
[B]oth the reasoning of the Court in Murphy and the result reached compel
the conclusion that use and derivative-use immunity is constitutionally sufficient to
compel testimony over a claim of the privilege. Since the privilege is fully
applicable and its scope is the same whether invoked in a state or in a federal
jurisdiction, the Murphy conclusion that a prohibition on use and derivative use
secures a witness Fifth Amendment privilege against infringement by the Federal
Government demonstrates that immunity from use and derivative use is coextensive
with the scope of the privilege. As the Murphy Court noted, immunity from use and
derivative use leaves the witness and the Federal Government in substantially the
same position as if the witness had claimed his privilege in the absence of a grant
of immunity. The Murphy Court was concerned solely with the danger of
incrimination under federal law, and held that immunity from use and derivative use
was sufficient to displace the danger. This protection coextensive with the privilege
is the degree of protection that the Constitution requires, and is all that the
Constitution requires even against the jurisdiction compelling testimony by granting
immunity.
****
Petitioners argue that use and derivative-use immunity will not adequately
protect a witness from various possible incriminating uses of the compelled
testimony: for example, the prosecutor or other law enforcement officials may obtain
leads, names of witnesses, or other information not otherwise available that might
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result in a prosecution. It will be difficult and perhaps impossible, the argument

goes, to identify, by testimony or cross-examination, the subtle ways in which the
compelled testimony may disadvantage a witness, especially in the jurisdiction
granting the immunity.
This argument presupposes that the statutes prohibition will prove
impossible to enforce. The statute provides a sweeping proscription of any use,
direct or indirect, of the compelled testimony and any information derived therefrom:
No testimony or other information compelled under the order (or any
information directly or indirectly derived from such testimony or other
information) may be used against the witness in any criminal case . . . . 18
U. S. C. 6002.
This total prohibition on use provides a comprehensive safeguard, barring the use of
compelled testimony as an investigatory lead, and also barring the use of any
evidence obtained by focusing investigation on a witness as a result of his compelled
disclosures.
A person accorded this immunity under 18 U. S. C. 6002, and subsequently
prosecuted, is not dependent for the preservation of his rights upon the integrity and
good faith of the prosecuting authorities. As stated in Murphy:
Once a defendant demonstrates that he has testified, under a state grant of
immunity, to matters related to the federal prosecution, the federal authorities
have the burden of showing that their evidence is not tainted by establishing
that they had an independent, legitimate source for the disputed evidence.
378 U.S., at 79 n. 18.
This burden of proof, which we reaffirm as appropriate, is not limited to a negation
of taint; rather, it imposes on the prosecution the affirmative duty to prove that the
evidence it proposes to use is derived from a legitimate source wholly independent
of the compelled testimony.
This is very substantial protection, commensurate with that resulting from
invoking the privilege itself. The privilege assures that a citizen is not compelled to
incriminate himself by his own testimony. It usually operates to allow a citizen to
remain silent when asked a question requiring an incriminatory answer. This statute,
which operates after a witness has given incriminatory testimony, affords the same
protection by assuring that the compelled testimony can in no way lead to the
infliction of criminal penalties. The statute, like the Fifth Amendment, grants neither
pardon nor amnesty. Both the statute and the Fifth Amendment allow the
government to prosecute using evidence from legitimate independent sources.
- 603 -
The statutory proscription is analogous to the Fifth Amendment requirement

in cases of coerced confessions. A coerced confession, as revealing of leads as
testimony given in exchange for immunity, is inadmissible in a criminal trial, but it
does not bar prosecution. Moreover, a defendant against whom incriminating
evidence has been obtained through a grant of immunity may be in a stronger
position at trial than a defendant who asserts a Fifth Amendment coerced-confession
claim. One raising a claim under this statute need only show that he testified under
a grant of immunity in order to shift to the government the heavy burden of proving
that all of the evidence it proposes to use was derived from legitimate independent
sources. On the other hand, a defendant raising a coerced-confession claim under the
Fifth Amendment must first prevail in a voluntariness hearing before his confession
and evidence derived from it become inadmissible.
There can be no justification in reason or policy for holding that the
Constitution requires an amnesty grant where, acting pursuant to statute and
accompanying safeguards, testimony is compelled in exchange for immunity from
use and derivative use when no such amnesty is required where the government,
acting without colorable right, coerces a defendant into incriminating himself. We
conclude that the immunity provided by 18 U. S. C. 6002 leaves the witness and
the prosecutorial authorities in substantially the same position as if the witness had
claimed the Fifth Amendment privilege. The immunity therefore is coextensive with
the privilege and suffices to supplant it. The judgment of the Court of Appeals for
the Ninth Circuit accordingly is affirmed.
Note on Kastigar
Kastigar approved a process whereby if a Government desires to prosecute a witness who
has been compelled to testify under use immunity, the Government must, upon the witnesss request,
demonstrate that it has made no direct or indirect use of the immunized testimony. This hearing is
commonly referred to as a Kastigar hearing.
As the Court noted, the ability to make the Government prove that it has lived up to the
bargain is a substantial protection, for the Government often cannot establish that it did not
improperly rely upon the immunized testimony.1464 Indeed, some have noted that derivative use
1464
See United States v. North, 910 F.2d 843 (D.C. Cir. 1990), indicating just how
difficult it may be to meet this burden. Although not all courts have adopted the North strict a view
of the Governments burden, it is clear that the burden is great, particularly after Hubble. See Lance
Cole, The Fifth Amendment and Compelled Production of Personal Documents After United States
v. Hubbell, 29 Am. J. Crim. L. 123, 180 ff. (2002).
In United States v. Bagdis, 2012 U.S. App. LEXIS 14672, fn. 3 (3d Cir. 2012), a
nonprecedential opinion, the Court note a split in the circuits as to some of the predicate procedures
for the Kastigar hearing:
Our sister courts have taken varying approaches. Some hold that the burden will only
shift once the defendant shows that he gave immunized testimony on matters relating
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immunity may have the practical effect of transactional immunity.1465 The substantial burden will
often discourage the Government from even seeking an indictment and, if it does obtain an
indictment, the Court may shut the Government out in a Kastigar hearing.
The problems inherent in the Kastigar hearing are the principal reason that federal
prosecutors resist conferring derivative use immunity by agreement and are loath to seek statutory
immunity.1466 Still, if the witness bargaining position is strong, the obtaining of derivative use
immunity can effectively prevent the Government from attempting a prosecution where it anticipates
that it will have significant Kastigar problems. A practitioner who stands his or her ground and
obtains derivative use immunity may thus have insulated the witness from prosecution.
Finally, because of this practical effect of immunity, the USAM provides the following
procedures for prosecutors who think there is some realistic possibility that the immunized witness
whether immunized by immunity order or by letter immunity should be prosecuted. These steps
are designed to meet Kastigars requirement that the prosecution be based on information that was
not derived from the immunized testimony:
1.
2.
3.
Before the witness testifies, prepare for the file a signed and dated memorandum
summarizing the existing evidence against the witness and the date(s) and source(s)
of such evidence;
Ensure that the witness's immunized testimony is recorded verbatim and thereafter
maintained in a secure location to which access is documented; and
Maintain a record of the date(s) and source(s) of any evidence relating to the witness
obtained after the witness has testified pursuant to the immunity order.1467
to the federal prosecution. See United States v. Blau, 159 F.3d 68, 72 (2d Cir. 1998)
("In the typical case, [a defendant's] failure to show the requisite factual relationship
would be sufficient to end the inquiry and avoid the necessity of a Kastigar
hearing."); United States v. Serrano, 870 F.2d 1, 15 (1st Cir. 1989). While others
shift the burden when a defendant demonstrates he testifies under a grant of
immunity, without necessarily inquiring into the subject matter of that testimony.
United States v. Cozzi, 613 F.3d 725, 728 (7th Cir. 2010); United States v. Streck,
958 F.2d 141, 144 (6th Cir. 1992).
1465
Lance Cole, The Fifth Amendment and Compelled Production of Personal
Documents After United States v. Hubbell, 29 Am. J. Crim. L. 123, 180 n. 365 (2002).
1466
In Ponds, the court noted (454 F.3d at p. 322):
Taken together, the bar on the use of information derived from a testimonial
act of production by a witness with 6002 immunity and the breadth of that bar
create real risks for prosecutors planning on prosecuting those whom they subpoena.
The decision to seek use immunity necessarily involves a balancing of the
Government's interest in obtaining information against the risk that immunity will
frustrate the Government's attempts to prosecute the subject of the investigation.
Doe, 465 U.S. at 616.
1467
U.S. Attorneys Criminal Resource Manual 726 titled Steps to Avoid Taint.
- 605 -
(5)
Is Kastigar Limited to Compelled Testimony?
The question has arisen whether the Kastigar protections are available for other types of
privileged information the prosecutors may possess and be tempted to use. For example, the
prosecutors may have obtained by search warrant documents (including emails) that are subject to
the attorney-client privilege or the patient-doctor privilege. Where that happens, can a charged
defendant put the prosecutors to a Kastigar-like hearing were they must prove that their case is
untainted by the privileged information in their possession? Only two courts of appeals appear to
have spoken on this issue and their answer is no.1468 Those courts are persuaded that the Fifth
Amendment constitution protection for compelled testimony sets such testimony apart from ordinary
testimonial or evidentiary privileges. (Although the Kastigar protections are not available for
nonconstitutional privileged documents in the Governments possession, a defendant confronting
the possible misuse of such privileged information may still object at trial or, if concerned enough,
may file a motion in limine1469 to flesh out the issue prior to trial; in either of these situations, of
course, the prosecutors will not bear the more onerous Kastigar burdens.)
d.
Prosecution Selective Grant of Immunity.
A problem with the prosecutors control over immunity grants is that the prosecutors may
use the power selectively to obtain testimony in the criminal trial that supports the prosecution but
refuse to give it to witnesses who might be willing to testify favorably to the defense but decline to
do so without a grant of immunity. The Second Circuit recently addressed this issue as follows
(United States v. Ebbers, 458 F.3d 110, 118-119 (2d Cir. 2006):1470
The government is under no general obligation to grant use immunity to
witnesses the defense designates as potentially helpful to its cause but who will
invoke the Fifth Amendment if not immunized.
A grant of use immunity may well hamper the government in a future
prosecution of a witness. In such a prosecution, the government would have to show
that the immunized testimony was not the source of any evidence it presents,
Kastigar v. United States, 406 U.S. 441, 460 (1972), and that the testimony of
government witnesses was not tainted by their knowledge of the immunized
testimony. Although the government may gain protection in completed investigations
by establishing a record of the evidence collected before the immunized testimony
1468
United States v. Squillacote, 221 F.3d 542 (4th Cir. 2000); and United States v.
Warshak, 631 F.3d 266 (6th Cir. 2010).
1469
Motions in limine are pretrial motions to obtain a ruling on evidentiary issues prior
to trial, thus avoiding delay at trial. They are not specifically authorized by the FRE or FRCrP, but
the practice has developed pursuant to the district courts inherent authority to manage the course
of trials. Luce v. United States, 469 U.S. 38, 41 n.4 (1984).
1470
Some citations and parallel report citations omitted.
- 606 -
is given, it may have difficulty shielding all its potential witnesses from that
testimony.
However, the ability to give immunity to one witness but not another is a
potentially powerful tool for a prosecutor, particularly in light of the prosecutor's
ability to create incentives for witnesses to invoke the privilege against
self-incrimination. There are, therefore, limits on the government's use of immunity.
In an extreme case, a court might hold that the absence of the non-immunized
witness caused the government's evidence to fall short of proof beyond a reasonable
doubt. In addition, a court may order the prosecution to choose between forgoing the
testimony of an immunized government witness or granting use immunity to
potential defense witnesses. To obtain such an order, a defendant must make a
two-pronged showing.
First, the defendant must show that the government has used immunity in a
discriminatory way, has forced a potential witness to invoke the Fifth Amendment
through overreaching, or has deliberately denied immunity for the purpose of
withholding exculpatory evidence and gaining a tactical advantage through such
manipulation.
We have said that a discriminatory grant of immunity arguably may be no
more than a decision . . . to confer immunity on some witnesses and not on others.
However, it may also be the case that the immunity decisions in question are so
obviously based on legitimate law enforcement concerns -- e.g., granting immunity
to a witness who has pleaded guilty and has been sentenced to substantial jail time
while denying it to a principal target of the ongoing criminal investigation -- that it
is clear that a court cannot intervene without substantially hampering the
administration of justice.
Prosecutorial overreaching can be shown through the use of threats,
harassment, or other forms of intimidation [which have] effectively forced the
witness to invoke the Fifth Amendment. The manipulation standard overlaps to
a degree with the discrimination test but involves an express finding of a tactical
purpose on the government's part.
Second, the defendant must show that the evidence to be given by an
immunized witness will be material, exculpatory and not cumulative and is not
obtainable from any other source. In that regard, exculpatory evidence is material
when it tends to show that the accused is not guilty. The bottom line at all times
is whether the non-immunized witness's testimony would materially alter the total
mix of evidence before the jury.
The showing is particularly hard to make as the further discussion in Ebbers shows.
- 607 -
e.
Other Scope Issues.

(1)
Introduction.
What else can the Government require a target to do that might tend to incriminate him? Of
course, as you all know, the Government can require the target to appear in a police line up, to be
photographed, to give blood samples and give handwriting exemplars. All of those acts may tend
to incriminate. Of these types of activities, the handwriting exemplar is most used in tax cases. The
Supreme Court in United States v. Euge, 444 U.S. 707 (1980), held that the Fifth Amendment is no
bar to the use of handwriting exemplar.
I turn to issues that are likely to become more prominent as we become more dependent upon
a global economy, and economic affairs increasingly touch many countries. The laws of other
countries may deny the IRS effective discovery of documents located in the other countries. Those
laws also may be put the taxpayer at risk of prosecution based on testimony that the IRS seeks to
compel for U.S. tax purposes. How does Fifth Amendment play out in this context?
(2)
Consent Directives.
In Doe v. United States,1471 the Court addressed the Fifth Amendment of consent directives.
The IRS uses these directives to present to foreign financial institutions to obtain information. The
IRS will summons the taxpayer and, upon his or her appearance, present a consent directive that,
according to its terms, authorized the foreign financial institution to release information to the IRS.
The taxpayer, appearing under the pseudonym John Doe, was the target of a federal grand
jury investigation. Doe appeared before the grand jury pursuant to a subpoena that directed him to
produce records of transactions in accounts at three named banks in the Cayman Islands and
Bermuda. Doe produced some bank records and testified that no additional records responsive to
the subpoena were in his possession or control. When questioned about the existence or location
of additional records, Doe invoked the Fifth Amendment privilege against self-incrimination.
The United States branches of the three foreign banks also were served with subpoenas
commanding them to produce records of accounts over which Doe had signatory authority. Citing
their governments bank-secrecy laws, which prohibit the disclosure of account records without the
customers consent, the banks refused to comply.
The Government then filed a motion with the court for an order compelling Doe to sign 12
forms consenting to disclosure of any bank records respectively relating to 12 foreign bank accounts
over which the Government knew or suspected that Doe had control. The forms indicated the
account numbers and described the documents that the Government wished the banks to produce.
The district court denied the motion on the ground that to acknowledge the bank accounts
would be testimonial, so that forced signing would violate Does Fifth Amendment privilege. They
1471
487 U.S. 201 (1988).
- 608 -
moved for reconsideration, submitting a revised proposed consent directive previously approved by
another court.1472 The revised consent purported to apply to any and all accounts over which Doe
had a right of withdrawal, without acknowledging the existence of any such account. The district
court again denied the motion.
The court of appeals reversed on the basis that the Fifth Amendment did not apply. The
court of appeals remanded.
On remand, the District Court ordered petitioner to execute the consent directive. He
refused. The District Court accordingly found petitioner in civil contempt and ordered that he be
confined until he complied with the order. The court stayed imposition of sanction pending appeal
and application for writ of certiorari.
Upon the taxpayers appeal of the contempt order, the Fifth Circuit affirmed in an
unpublished per curiam opinion. The case came to the Supreme Court on certiorari from the
judgment based on that opinion. The Supreme Court granted certiorari to resolve a conflict among
the Courts of Appeals as to whether the compelled execution of a consent form directing the
disclosure of foreign bank records is inconsistent with the Fifth Amendment. The Court held that
it was not.
The Court started its analysis by focusing the issue as follows:
It is undisputed that the contents of the foreign bank records sought by the
Government are not privileged under the Fifth Amendment. See Braswell v. United
States* * *; United States v. Doe* * *; Fisher v. United States* * * *. There also is
no question that the foreign banks cannot invoke the Fifth Amendment in declining
to produce the documents; the privilege does not extend to such artificial entities.
See Braswell * * *; Bellis v. United States, 417 U.S. 85, 89-90 (1974). Similarly,
petitioner asserts no Fifth Amendment right to prevent the banks from disclosing the
account records, for the Constitution necessarily does not proscribe incriminating
statements elicited from another. Couch v. United States, 409 U.S. 322, 328 (1973).
Petitioners sole claim is that his execution of the consent forms directing the banks
to release records as to which the banks believe he has the right of withdrawal has
independent testimonial significance that will incriminate him, and that the Fifth
Amendment prohibits governmental compulsion of that act.
The Court then reasoned that the Fifth Amendment protects only against compelled
testimony. Here, the consent would be compelled, but the question is whether it is testimonial. The
Court reviewed its jurisprudence on the act of production doctrine:
The Governments view of the privilege, apparently accepted by the Courts of
Appeals that have considered compelled consent forms, is derived largely from this
Courts decisions in Fisher and Doe. The issue presented in those cases was whether
1472
United States v. Ghidoni, 732 F. 2d 814, cert. denied, 469 U.S. 932 (1984).
- 609 -
the act of producing subpoenaed documents, not itself the making of a statement,
might nonetheless have some protected testimonial aspects. The Court concluded
that the act of production could constitute protected testimonial communication
because it might entail implicit statements of fact: by producing documents in
compliance with a subpoena, the witness would admit that the papers existed, were
in his possession or control, and were authentic. * * * * Thus, the Court made clear
that the Fifth Amendment privilege against self-incrimination applies to acts that
imply assertions of fact.
We reject petitioners argument that this test does not control the
determination as to when the privilege applies to oral or written statements. While
the Court in Fisher and Doe did not purport to announce a universal test for
determining the scope of the privilege, it also did not purport to establish a more
narrow boundary applicable to acts alone. To the contrary, the Court applied basic
Fifth Amendment principles. An examination of the Courts application of these
principles in other cases indicates the Courts recognition that, in order to be
testimonial, an accuseds communication must itself, explicitly or implicitly, relate
a factual assertion or disclose information. Only then is a person compelled to be a
witness against himself.
This understanding is perhaps most clearly revealed in those cases in which
the Court has held that certain acts, though incriminating, are not within the
privilege. Thus, a suspect may be compelled to furnish a blood sample, * * *; to
provide a handwriting exemplar, * * *, or a voice exemplar, * * *; to stand in a
lineup, * * *; and to wear particular clothing, * * *. These decisions are grounded on
the proposition that the privilege protects an accused only from being compelled to
testify against himself, or otherwise provide the State with evidence of a testimonial
or communicative nature. * * * * The Court accordingly held that the privilege was
not implicated in each of those cases, because the suspect was not required to
disclose any knowledge he might have, or to speak his guilt, * * *. It is the
extortion of information from the accused, * * * the attempt to force him to
disclose the contents of his own mind, * * * that implicates the Self-Incrimination
Clause. * * * * Unless some attempt is made to secure a communication -- written,
oral or otherwise -- upon which reliance is to be placed as involving [the accuseds]
consciousness of the facts and the operations of his mind in expressing it, the demand
made upon him is not a testimonial one. * * * *.
It is consistent with the history of and the policies underlying the
Self-Incrimination Clause to hold that the privilege may be asserted only to resist
compelled explicit or implicit disclosures of incriminating information. Historically,
the privilege was intended to prevent the use of legal compulsion to extract from the
accused a sworn communication of facts which would incriminate him. Such was
the process of the ecclesiastical courts and the Star Chamber -- the inquisitorial
method of putting the accused upon his oath and compelling him to answer questions
- 610 -
designed to uncover uncharged offenses, without evidence from another source. * *

* * The major thrust of the policies undergirding the privilege is to prevent such
compulsion. The Self-Incrimination Clause reflects a judgment . . . that the
prosecution should [not] be free to build up a criminal case, in whole or in part, with
the assistance of enforced disclosures by the accused (emphasis added). * * * * The
Court in Murphy v. Waterfront Commn of New York Harbor, * * * explained that
the privilege is founded on
our unwillingness to subject those suspected of crime to the cruel trilemma
of self-accusation, perjury or contempt; our preference for an accusatorial
rather than an inquisitorial system of criminal justice; our fear that
self-incriminating statements will be elicited by inhumane treatment and
abuses; our sense of fair play which dictates a fair state-individual balance
by requiring the government to leave the individual alone until good cause
is shown for disturbing him and by requiring the government in its contest
with the individual to shoulder the entire load, . . .; our respect for the
inviolability of the human personality and of the right of each individual to
a private enclave where he may lead a private life, . . .; our distrust of
self-deprecatory statements; and our realization that the privilege, while
sometimes a shelter to the guilty, is often a protection to the innocent.
Id., at 55 (citations omitted).
These policies are served when the privilege is asserted to spare the accused
from having to reveal, directly or indirectly, his knowledge of facts relating him to
the offense or from having to share his thoughts and beliefs with the Government.
We are not persuaded by petitioners arguments that our articulation of the
privilege fundamentally alters the power of the Government to compel an accused
to assist in his prosecution. There are very few instances in which a verbal
statement, either oral or written, will not convey information or assert facts. The vast
majority of verbal statements thus will be testimonial and, to that extent at least, will
fall within the privilege. Furthermore, it should be remembered that there are many
restrictions on the governments prosecutorial practices in addition to the
Self-Incrimination Clause. Indeed, there are other protections against governmental
efforts to compel an unwilling suspect to cooperate in an investigation, including
efforts to obtain information from him. We are confident that these provisions,
together with the Self-Incrimination Clause, will continue to prevent abusive
investigative techniques.
- 611 -
B
The difficult question whether a compelled communication is testimonial for
purposes of applying the Fifth Amendment often depends on the facts and
circumstances of the particular case. * * * * This case is no exception. We turn,
then, to consider whether Does execution of the consent directive at issue here
would have testimonial significance. We agree with the Court of Appeals that it
would not, because neither the form, nor its execution, communicates any factual
assertions, implicit or explicit, or conveys any information to the Government.
The consent directive itself is not testimonial. It is carefully drafted not to
make reference to a specific account, but only to speak in the hypothetical. Thus, the
form does not acknowledge that an account in a foreign financial institution is in
existence or that it is controlled by petitioner. Nor does the form indicate whether
documents or any other information relating to petitioner are present at the foreign
bank, assuming that such an account does exist. * * * *. The form does not even
identify the relevant bank. Although the executed form allows the Government
access to a potential source of evidence, the directive itself does not point the
Government toward hidden accounts or otherwise provide information that will assist
the prosecution in uncovering evidence. The Government must locate that evidence
by the independent labor of its officers, * * * *. As in Fisher, the Government
is not relying upon the truthtelling of Does directive to show the existence of,
or his control over, foreign bank account records. * * * * Given the consent
directives phraseology, petitioners compelled act of executing the form has no
testimonial significance either. By signing the form, Doe makes no statement,
explicit or implicit, regarding the existence of a foreign bank account or his control
over any such account. Nor would his execution of the form admit the authenticity
of any records produced by the bank. * * * *. Not only does the directive express no
view on the issue, but because petitioner did not prepare the document, any statement
by Doe to the effect that it is authentic would not establish that the records are
genuine. * * * *. Authentication evidence would have to be provided by bank
officials.
Finally, we cannot agree with petitioners contention that his execution of the
directive admits or asserts Does consent. The form does not state that Doe
consents to the release of bank records. Instead, it states that the directive shall
be construed as consent with respect to Cayman Islands and Bermuda bank-secrecy
laws. Because the directive explicitly indicates that it was signed pursuant to a court
order, Does compelled execution of the form sheds no light on his actual intent or
state of mind. The form does direct the bank to disclose account information and
release any records that may exist and for which Doe may be a relevant
principal. But directing the recipient of a communication to do something is not an
assertion of fact or, at least in this context, a disclosure of information. In its
testimonial significance, the execution of such a directive is analogous to the
- 612 -
production of a handwriting sample or voice exemplar: it is a nontestimonial act. In

neither case is the suspects action compelled to obtain any knowledge he might
have. Wade, 388 U.S., at 222.
The dissent apparently disagrees with us on this point, although the basis for
its disagreement is unclear. See post, at 221-222, n. 2. Surely, the fact that the
executed form creates a new piece of evidence that may be used against petitioner
is not relevant to whether the execution has testimonial significance, for the same
could be said about the voice and writing exemplars the Court found were not
testimonial in nature. Similarly irrelevant to the issue presented here is the dissents
invocation of the First Circuits hypothetical of how the Government might use the
directive to link petitioner to whatever documents the banks produce. That
hypothetical, as the First Circuit indicated, Ranauro, 814 F. 2d, at 793, goes only to
showing that the directive may be incriminating, an issue not presented in this case.
See n. 5, supra. It has no bearing on whether the compelled execution of the
directive is testimonial.
We read the directive as equivalent to a statement by Doe that, although he
expresses no opinion about the existence of, or his control over, any such account,
he is authorizing the bank to disclose information relating to accounts over which,
in the banks opinion, Doe can exercise the right of withdrawal. * * * *. When
forwarded to the bank along with a subpoena, the executed directive, if effective
under local law, will simply make it possible for the recipient bank to comply with
the Governments request to produce such records. As a result, if the Government
obtains bank records after Doe signs the directive, the only factual statement made
by anyone will be the banks implicit declaration, by its act of production in response
to the subpoena, that it believes the accounts to be petitioners. Cf. Fisher, 425 U.S.,
at 410, 412-413. The fact that the banks customer has directed the disclosure of his
records would say nothing about the correctness of the banks representations.
Brief for United States 21-22. Indeed, the Second and Eleventh Circuits have
concluded that consent directives virtually identical to the one here are inadmissible
as an admission by the signator of either control or existence. * * * *.
In light of Doe, a taxpayer subjects himself or herself to almost certain contempt and
sanctions, including incarceration, for refusing to sign a consent directive. As is often the case in
Supreme Court jurisprudence, however, shifts occur in constitutional analysis. Doe is the law now,
at least for the lower courts who will impose contempt sanctions. But, the Supreme Court can
always shift the analysis and arguably reach another result based on subsequent refinements in its
analysis of the Fifth Amendment and other constitutional protections, such as the right of privacy,
that were not addressed in Doe. In a recent article, prominent practitioners have concluded:
In summary, an individual or company facing a government demand that they
consent to the release of foreign bank account information need not necessarily
acquiesce. The correct course of action will depend on many factors, but declining
- 613 -
to sign the releases should be part of the discussion, as there may be a sound legal
basis to resist the government's efforts. If the DOJ has no other mechanism to get the
information, then declining to consent may effectively derail the prosecution.1473
Of course, merely the possibility of derailing the prosecution at the cost of suffering contempt
charges may not be the most appetizing alternative for a taxpayer. So the taxpayer is between a rock
and a hard place. And, most taxpayers are not going to be willing to suffer contempt in order to see
if they can chase the issue of the continuing viability through the courts when there is significant
chance that the Supreme Court would not agree to re-consider and, even if it did, might reach the
same bottom-line decision to order the taxpayer to sign over the various objections that might be
mounted.
The IRSs ultimate ability to get to the underlying records is wholly dependent upon the
foreign person complying with the consent directive. Here too, the foreign person may take the
position that it is prohibited from complying with such a compelled consent directive.1474 And, if
a person to whom the consent directive is addressed is beyond the U.S. summons or subpoena
power, no further effective steps can be taken. Certainly, the taxpayer cannot be jailed because the
foreign person refuses to comply.
(3)
Compulsory Process for Foreign Documents.
One alternative to the consent directive is to summons or subpoena the foreign person who
has the bank records abroad, but finds himself or itself within the summons or subpoena power of
the U.S. Thus, in United States v. Bank of Nova Scotia,1475 the grand jury issued a grand jury
subpoena to the U.S. branch of a Bahamas bank whose laws arguably forbade the bank to produce
the documents. Laws forbidding disclosure of bank information is a common feature in tax haven
jurisdictions who want to encourage taxpayers from other countries to make deposits. The Court
enforced the subpoena. This type of subpoena of a U.S. person (such as a U.S. branch) for foreign
records is now commonly referred as a Bank of Nova Scotia subpoena.1476
Of course, the person caught in this bind can refuse to comply and suffer the U.S.
consequences possible imprisonment for contempt if the person is an individual or, if a
corporation, at least a stiff and continuing fine for which its U.S. assets would be at jeopardy.
1473
See Timothy P. O'Toole, Dawn E. Murphy-Johnson, and George M. Clarke III, Can
a Prosecutor Make you Cough Up Your Offshore Account?, 130 Tax Notes 1313 (Mar. 14, 2011).
1474
See Id. fn. 16; See also In re Grand Jury Proceedings (Marsoner), 40 F.3d 959, 966
(9th Cir. 1994), cert. denied, 515 U.S. 1132 (1995).
1475
691 F.2d 1384 (11th Cir. 1982), cert. denied 462 U.S. 1119 (1983).
1476
See e.g., USAM, Title 9, 279B (requiring special advance approval procedures
before issuing unilateral compulsory process because the process can adversely affect the law
enforcement relationship with the foreign country.
- 614 -
(4)
Fear of Foreign Prosecution.
There is no question that a witness may refuse to answer questions that may subject him or
her to federal or state prosecution in the United States. Thus, for example, if a state has given a
witness immunity from prosecution in order to force him to testify, the federal government cannot
then use the fruits of that testimony to prosecute the witness.1477 The grant of immunity by the state
government effectively gives the witness use and derivative use immunity from prosecution by the
federal government.
But, even if the witness is given effective use and derivative use immunity from federal and
state prosecution, can the witness refuse to testify based on fear of foreign prosecution? In this
increasing global economy, of course, cross-border tax crimes will become more common, so in a
tax case, a witness might be inclined to assert the Fifth Amendment not on the basis that he is
subjecting himself to U.S. criminal prosecution but that he is subjecting himself to foreign criminal
prosecution in a country in which he has done business.
In United States v. Balsys,1478 the United States sought to deport the witness for his wartime
activities in Nazi Germany. The witness asserted the Fifth Amendment privilege on the basis that
answering might tend to incriminate him for crimes in the foreign country to which he would be
deported. The witness, of course, could not assert the privilege simply because of fear of
deportation, which was a civil proceeding. Potential foreign prosecution was all that he could assert.
The Supreme Court held that the taxpayer could not base the assertion of a Fifth Amendment
privilege on potential foreign prosecution, even though the United States would deliver any
testimony he would be forced to give to the foreign country to which he would be deported and in
which he had a fear of prosecution. How is the fear of foreign prosecution different than the fear
of federal prosecution in a state case?
I have noted elsewhere in these materials that there are powerful initiatives in process to
promote the international sharing of tax-related information between governments.1479 Pursuant to
these initiatives, foreign governments may ask the United States, through the IRS, to obtain
information with a situs in the United States. Under the agreements pursuant to these initiatives,
upon such a request, the IRS may use its compulsory process the administrative summons to
compel a witness to testify or obtain documents and then transfer the information to the foreign
government.
Query whether the rule of Balsys would apply if the United States sought testimony from a
potential target of the foreign prosecution. In the materials regarding international investigations,
that there is authority suggesting that the mere fact that the foreign governments inquiry may have
a criminal focus would not prevent the IRS from using the administrative summons to obtain the
1477
1478
1479
See Kastigar v. United States, 406 U.S. 441 (1972).

524 U.S. 666 (1998).
See materials beginning at p. 533.
- 615 -
information for the foreign government.1480 Yet, in Balsys, the majority opinion (written by Justice
Souter) leaves open the possibility that cooperative actions by the countries (as opposed to just the
United States unilateral action as in a deportation action) might permit the invocation of the Fifth
Amendment.
Lets posit an example to frame the issue. Assume that the taxpayer, a large U.S.
multinational corporation, has fraudulently manipulated its transfer prices in transactions touching,
say, three countries, one of which is a tax haven (meaning it has low rates). The result of the
manipulation was that the taxable profits were shifted to the tax haven country that should have been
taxed in the U.S. and the other foreign country (Non-Haven Country). Obviously, both the U.S.
and the Non-Haven Country have an interest in investigating the matter, and that interest may be
criminal under the laws of both countries. In the United States IRS investigation, the witness could
clearly invoke the Fifth Amendment privilege. Suppose, however, that the United States grants
immunity to the witness. Assume further that, under an exchange of information treaty, the United
States may share the fruits of the interview with the Non-Haven Country or alternatively the
Non-Haven Country specifically asks the United States to use its summons power to obtain the
testimony of the U.S. witness for use in its investigation. Does the witness have a Fifth Amendment
privilege in that proceeding? Balsys leaves open the possibility that the Fifth Amendment could be
asserted.
D.
Accountant Privilege.
1.
Introduction.
Federal law recognizes no privilege that protects communications between an accountant and
his client.1481 States may confer the privilege, and the professional rules of the accounting profession
may require confidentiality. But those rules do not create a federally recognized accountant-client
privilege.1482
Privileges being to some extent influenced by the common law, courts from time-to-time are
importuned to carve out some type of accountant-client privilege in some situations. Perhaps the
strongest case was made in a case to which we now turn.
1480
See Stuart, supra.

Couch v. United States, 409 U.S. 322, 335 (1973).
1482
For an interesting application of this statement, see In re Grand Jury Proceedings,
Grand Jury No. 08-4, 607 F.Supp. 803 (W.D. Tex. 2009) where a grand jury subpoena duces tecum
was issued to a CPA who claimed that the Texas CPA rules prohibited him from turning over the
client information without a court order. Literally, the Texas rules did require an order, but as
interpreted by the governing agency, a grand jury subpoena would suffice and, in any event, federal
law (i.e., the compulsory federal grand jury subpoena) trumped. The court so held. I guess, the
CPA got his order.
1481
- 616 -
2.
Arthur Young.
In United States v. Arthur Young & Co.,1483 the issue was whether an independent certified
public accountants tax accrual workpapers prepared incident to financial audits are privileged. In
that case, the accountants verified the public firms financial statements. The tax accrual
workpapers were described by the Court as follows:
An important aspect of the auditors function is to evaluate the adequacy and
reasonableness of the corporations reserve account for contingent tax liabilities.
This reserve account, known as the tax accrual account, the noncurrent tax account,
or the tax pool, represents the amount set aside by the corporation to cover
adjustments and additions to the corporations actual tax liability. Additional
corporate tax liability may arise from a wide variety of transactions. The presence
of a reserve account for such contingent tax liabilities reflects the corporations
awareness of, and preparedness for, the possibility of an assessment of additional
taxes.
The accountants tax accrual workpapers are the backup for its review of the reserve account for
adequacy and reasonableness and analyze questionable tax positions that may result in liabilities for
the client. In short, tax accrual workpapers pinpoint the soft spots on a corporations tax return
by highlighting those areas in which the corporate taxpayer has taken a position that may, at some
later date, require the payment of additional taxes. The mother lode!
The IRS summonsed the workpapers from the accountants and, upon the accountants
assertion of privilege, moved to enforce the summons. The case wended its way to the Supreme
Court on the issue of whether the accountants had a privilege to assert.
The accountants argument was essentially that public company financial statements are so
critical to the financial markets that a privilege should be created under federal common law where
none existed before because, otherwise clients would be less forthcoming with their auditors.
The Court rejected the asserted privilege, reasoning:
While 7602 [the summons power] is subject to the traditional privileges
and limitations, id., * * * any other restrictions upon the IRS summons power
should be avoided absent unambiguous directions from Congress. United States
v. Bisceglia, supra, at 150. We are unable to discern the sort of unambiguous
directions from Congress that would justify a judicially created work-product
immunity for tax accrual workpapers summoned under 7602. Indeed, the very
language of 7602 reflects precisely the opposite: a congressional policy choice in
favor of disclosure of all information relevant to a legitimate IRS inquiry. In light
of this explicit statement by the Legislative Branch, courts should be chary in
recognizing exceptions to the broad summons authority of the IRS or in fashioning
1483
465 U.S. 805 (1984).
- 617 -
new privileges that would curtail disclosure under 7602. * * * *. If the broad
latitude granted to the IRS by 7602 is to be circumscribed, that is a choice for
Congress, and not this Court, to make. See United States v. Euge, 444 U.S., at 712.
****
[A]s this Court stated in Couch v. United States, 409 U.S. 322, 335 (1973),
no confidential accountant-client privilege exists under federal law, and no
state-created privilege has been recognized in federal cases. In light of Couch, the
Court of Appeals effort to foster candid communication between accountant and
client by creating a self-styled work-product privilege was misplaced, and conflicts
with what we see as the clear intent of Congress.
Nor do we find persuasive the argument that a work-product immunity for
accountants tax accrual workpapers is a fitting analogue to the attorney
work-product doctrine established in Hickman v. Taylor, 329 U.S. 495 (1947). The
Hickman work-product doctrine was founded upon the private attorneys role as the
clients confidential adviser and advocate, a loyal representative whose duty it is to
present the clients case in the most favorable possible light. An independent
certified public accountant performs a different role. By certifying the public reports
that collectively depict a corporations financial status, the independent auditor
assumes a public responsibility transcending any employment relationship with the
client. The independent public accountant performing this special function owes
ultimate allegiance to the corporations creditors and stockholders, as well as to the
investing public. This public watchdog function demands that the accountant
maintain total independence from the client at all times and requires complete
fidelity to the public trust. To insulate from disclosure a certified public accountants
interpretations of the clients financial statements would be to ignore the significance
of the accountants role as a disinterested analyst charged with public obligations.
We cannot accept the view that the integrity of the securities markets will
suffer absent some protection for accountants tax accrual workpapers. The Court
of Appeals apparently feared that, were the IRS to have access to tax accrual
workpapers, a corporation might be tempted to withhold from its auditor certain
information relevant and material to a proper evaluation of its financial statements.
But the independent certified public accountant cannot be content with the
corporations representations that its tax accrual reserves are adequate; the auditor
is ethically and professionally obligated to ascertain for himself as far as possible
whether the corporations contingent tax liabilities have been accurately stated. If
the auditor were convinced that the scope of the examination had been limited by
managements reluctance to disclose matters relating to the tax accrual reserves, the
auditor would be unable to issue an unqualified opinion as to the accuracy of the
corporations financial statements. Instead, the auditor would be required to issue
- 618 -
a qualified opinion, an adverse opinion, or a disclaimer of opinion, thereby notifying

the investing public of possible potential problems inherent in the corporations
financial reports. Responsible corporate management would not risk a qualified
evaluation of a corporate taxpayers financial posture to afford cover for
questionable positions reflected in a prior tax return. Thus, the independent auditors
obligation to serve the public interest assures that the integrity of the securities
markets will be preserved, without the need for a work-product immunity for
accountants tax accrual workpapers.
We also reject respondents position that fundamental fairness precludes IRS
access to accountants tax accrual workpapers. Respondents urge that the
enforcement of an IRS summons for accountants tax accrual workpapers permits the
Government to probe the thought processes of its taxpayer citizens, thereby giving
the IRS an unfair advantage in negotiating and litigating tax controversies. But if the
SEC itself, or a private plaintiff in securities litigation, sought to obtain the tax
accrual workpapers at issue in this case, they would surely be entitled to do so. In
light of the broad congressional command of 7602, no sound reason exists for
conferring lesser authority upon the IRS than upon a private litigant suing with
regard to transactions concerning which the public has no interest.
****
Beyond question it is desirable and in the public interest to encourage full
disclosures by corporate clients to their independent accountants; if it is necessary
to balance competing interests, however, the need of the Government for full
disclosure of all information relevant to tax liability must also weigh in that balance.
This kind of policy choice is best left to the Legislative Branch. Accordingly, the
judgment of the Court of Appeals is affirmed in part and reversed in part, and the
case is remanded for proceedings consistent with this opinion.
Although the IRS won this round in the Supreme Court, it recognized the arguments in part
by adopting a policy allowing demand for the tax accrual workpapers only in unusual circumstances.
The IRS realized that, should it exploit its victory in Arthur Young by routine access to the tax
accrual workpapers, Congress might well act to take away its victory if it felt the public markets
would be negatively impacted. Accordingly, the IRS initially adopted policies exhibiting
considerable restraint with respect to tax accrual workpapers but the IRSs restraint is being relaxed
with respect to corporate tax shelters.1484 I do not review those policies in detail, but suffice it to
say that the IRM generally limits requests or summonses for such workpapers to unusual situations
1484
IRM 4.10.20 (as adopted in 2004, following Announcement 2002- 63, 2002-27 IRB
1; 25.5.4.4.7 (Reserved); see also 34.12.3.6(2) & 34.12.3.13; 35.6.5.6. In CC-2003-012 (4/9/03),
reproduced at 2003 TNT 74-9 (4/17/03), the IRS announced procedures with respect to its policy
regarding tax accrual workpapers.
- 619 -
only where it is shown to be necessary and requires a higher level of approval.1485 Still, the
Enron/Worldcom and related scandals and abusive corporate tax shelter scandals have caused the
IRS to relax its policy of restraint, particularly with respect to tax shelters.1486
Moreover, the reforms adopted after the corporate financial frauds exposed in the late 1990s
and early 2000s (with Enron being the capstone), including Sarbanes-Oxley,1487 require that auditors
undertake increased diligence with respect to financial statements. Focusing on the adequacy of
corporations tax reserves, auditors have begun demanding to see legal advice rendered to the
corporation regarding their liabilities. Turning over legal advice to auditors is a waiver of the
attorney-client privilege. But, as we discuss below in connection with the work product privilege,
the availability of the work product doctrine to protect at least some portion of the tax accrual
workpapers is perhaps a live issue, since the Supreme Court in Arthur Young merely addressed the
viability of an accountants privilege. It remains to be seen whether the combination of the tax
shelter problem and the CPAs increased concerns over Sarbanes-Oxley and related reforms will
result in the IRS more aggressively pursuing the tax accrual workpapers and the legal advice
received by the corporation that may be relevant to proper tax accruals.1488 As I note in discussing
the work product doctrine, waiver is more constricted than with the attorney-client privilege and thus
there is at least room for argument at this stage that disclosure to the auditors is not a waiver for
material in the tax accrual workpapers that would otherwise be work product.
Finally, privileges are not important where the client has an incentive to waive them. In the
current post-Enron environment where major organizations (whether corporations and otherwise
formed (such limited liability noncorporate entities used by major law and accounting firms) are the
vehicles for major fraud, the organization can often be indicted for the misconduct of its officers and
the indictment can be a major detriment to the viability to the corporation or other entity. For
example, indictment brought down the venerable accounting firm of Arthur Andersen.
1485
IRM 4.10.20.3(2) (The general standard for requests for audit or tax accrual
workpapers is the unusual circumstances standard.) and 4.10.20.3.1.
1486
Announcement 2002-63; 2002-27 IRB 1. See also Memorandum by Deborah Nolan,
Commissioner, LMSB, dated 7/9/04, published Kenneth A. Gary and Sheryl Stratton, IRS
Balancing Workpaper Request Restraint With Deterrence, Korb Says, 2004 TNT 138-1 (7/19/04)
(discussing changes to the IRM to reflect the policy in the announcement which makes demanding
access to the tax accrual workpapers mandatory when the taxpayer claims the benefit of listed
transactions); and Sheryl Stratton, Panel Discusses Taxpayers Caught in Tax Accrual Workpaper
Crunch, 2005 TNT 38-1.
1487
Sarbanes-Oxley Act of 2002, P.L. No. 107-204, 116 Stat. 745.
1488
See Sheryl Stratton, No Change in Workpaper Request Policy, IRS Official Says,
2004 TNT 108-2 (6/3/04); and Kenneth A. Gary, More Shelter Settlements, Requests for
Workpapers to Come, IRS Official Warns, 2004 TNT 119-4 (6/17/04).
- 620 -
3.
The New Tax Practitioner Privilege (FATP).
Although there is no accountant-client privilege generally recognized in federal law,

accountants successfully lobbied for and obtained a limited privilege in the 98 Act. Section 7525
provides as follows:
Sec. 7525 Confidentiality privileges relating to taxpayer communications
(a) Uniform application to taxpayer communications with federally
authorized practitioners
(1) General rule. With respect to tax advice, the same common law
protections of confidentiality which apply to a communication between a taxpayer
and an attorney shall also apply to a communication between a taxpayer and any
federally authorized tax practitioner to the extent the communication would be
considered a privileged communication if it were between a taxpayer and an
attorney.
(2) Limitations. Paragraph (1) may only be asserted in-(A) any noncriminal tax matter before the Internal Revenue
Service; and
(B) any noncriminal tax proceeding in Federal court brought
by or against the United States.
(b) Section Not to Apply to Communications Regarding Tax Shelters. The
privilege under subsection (a) shall not apply to any written communication which
is -(1) between a federally authorized tax practitioner and -(A) any person,
(B) any director, officer, employee, agent, or representative
of the person, or
C) any other person holding a capital or profits interest in the
person, and
(2) in connection with the promotion of the direct or indirect
participation of the person in any tax shelter (as defined in section
6662(d)(2)(C)(ii)).1489
The privilege is accorded to federally authorized tax practitioners (FATPs, in the
ubiquitous world of acronyms). FATPs include CPAs and enrolled agents and actuaries authorized
to practice before the IRS. CPAs were the principal lobbyists for the position because they desired
to better compete with lawyers in the lucrative area of tax practice.
Most importantly for this course, the privilege will not be applicable in any criminal
investigation or prosecution. And, although not directly relevant to the criminal context for the
present materials, the new privilege does direct us to the issue of the scope of the attorney-client
1489
7525(b) is as amended by the American Jobs Creation Act of 2004.
- 621 -
privilege and the other pitfalls attending the attorney-client privilege that accountants may not be
familiar with.1490
The FATP privilege is relatively new and thus its nuances have not been fleshed out.1491 We
will see Judge Posners comments on this new privilege in United States v. Frederick,1492 included
below in discussing the attorney-client privilege. But for the time being, note that the scope of the
privilege is limited to the type of communications that, if made between attorneys and their clients,
would be subject to the attorney-client privilege. I therefore turn to the attorney-client privilege.
E.
Attorney-Client Privilege.
1.
Introduction.
We attorneys think that we understand the attorney-client privilege, and at a basic level in
most situations, undoubtedly we do. The classic statement of the privilege is (8 Wigmore on
Evidence 2292 (McNaughton rev. 1961)):
(1) Where legal advice of any kind is sought (2) from a professional legal
adviser in his capacity as such, (3) the communications relating to that purpose, (4)
made in confidence (5) by the client, (6) are at his instance permanently protected
(7) from disclosure by himself or by the legal adviser, (8) except the protection be
waived.1493
Federal Courts apply a more generalized federal common law attorney-client privilege.1494
There is no definitive statement of this federal common law privilege, so Wigmores definition is
often used as a starting point. In addition, Proposed FRE 503(b), 56 F.R.D. 183, 326 (1972),
1490
See ALI-ABA Panel Points out Problems, Pitfalls of Tax Adviser Privilege, 98 TNT
213-1 (11/4/98).
1491
For good recent discussions as to development with the FATP, see Claudine V.
Pease-Wingentner, Lemons from Lemonade: The Courts Fumble the FATP Privilege, 129 Tax Notes
977 (Nov. 29, 2010); Kip Dellinger, The Statutory FATP Privilege, 130 Tax Notes 475 (Jan. 24,
2011).
1492
182 F.3d 496 (1999).
1493
See also for a discussion of recent developments related to the attorney-client
privilege in the tax context, Martin J. McMahon & Ira B. Shepard, Privilege and the Work Product
Doctrine in Tax Cases, 58 Tax Lawyer 405 (2005) (despite the breadth of the title, the article focuses
on the attorney-client privilege rather than other privileges (such as the Fifth Amendment
privilege)). The article, of courses, quotes the classic and oft-cited Wigmore definition contained
in the text above.
1494
Rule 501, Federal Rules of Evidence; see Johnson v. Commissioner, 119 T.C. No.
27 (2002).
- 622 -
although not adopted, is recognized as a source of general guidance regarding federal common law
principles.1495 That proposed rule is:
A client has a privilege to refuse to disclose and to prevent any other person
from disclosing confidential communications made for the purpose of facilitating the
rendition of professional legal services to the client, (1) between himself or his
representative and his lawyer or his lawyer's representative, or (2) between his
lawyer and the lawyer's representative, or (3) by him or his lawyer to a lawyer
representing another in a matter of common interest, or (4) between representatives
of the client or between the client and a representative of the client, or (5) between
lawyers representing the client.
Under either iteration, the test seems relatively straight-forward. There are, however, many
nuances to the attorney-client privilege that inhere, sometimes unsuspectingly, in these classic
statements of the attorney-client privilege. The complexity is, of course, why the new tax
practitioners privilege discussed above designed to level the playing field in some respects between
attorneys and accountants may prove to be a mixed blessing to accountants, as they stumble their
way through a concept that, by training, they may not be equipped to handle.
I mention only one subtlety that even many lawyers fail to grasp. Focus on (5) of the
Wigmore definition. The communications protected are the clients communications to the lawyer.
There is nothing in that definition that protects the lawyers communications to the client. The
courts generally hold, however, that the lawyers communications to the client are protected to the
extent that they may tend to disclose the clients confidential communications to the lawyer.1496 The
language of some opinions may give some degree of broader scope of privilege for lawyer
communications to the client,1497 but I caution that you should be wary because courts may be
inclined to apply the Wigmore definition strictly.
Finally, do not assume that the attorney-client privilege will protect against compulsory
disclosure of otherwise qualifying attorney-client communications in all contexts. Certainly, it does
so in the criminal investigation context which is the focus of this text. But, you should be aware that
1495
In re Grand Jury Investigation, 399 F.3d 527, 532 (2d Cir. 2005); see also United
States v. BDO Seidman, LLP, 492 F.3d 806, 814-815 (7th Cir. 2007) (quoting In re Grand Jury
Investigation).
1496
Thus, if nothing in the lawyers communications to the client discloses confidential
client communications to the lawyer, then the lawyers communications are not privileged. E.g.,
United States v. Adlman, 68 F.3d 1495, 1498-1501 (2d Cir. 1995); American Standard Inc. v. Pfizer
Inc., 828 F.2d 734, 745 (Fed. Cir. 1987). Of course, any lawyer opinion rendered within the scope
of the clients request for legal advice or representation would be privileged. See e.g., United States
v. Neal, 27 F.3d 1035, 1048 (5th Cir. 1994) (privilege applies to attorney communications to client
only to the extent that these are based on, or may disclose, confidential information provided by
the client or contain advice or opinions of the attorney.).
1497
See McMahon & Shepard, supra, at pp. 406-7 (particularly the cases at n. 11).
- 623 -
congressional committees occasionally claim that, in congressional investigations, they are not to
be impeded by the attorney-client privilege.1498 That claim has not been definitively resolved, but
given the recent propensity of congressional committees to start an investigation at the early reports
of major business scandals, it is not uncommon for congressional investigations to precede criminal
prosecutions, thus heightening the tension in this area.1499
I deal here with certain aspects of the privilege that play out in criminal tax context.
2.
Attorney-Client Privilege in a Corporate Setting.

a.
General - the Upjohn Case.
The question is who is the client in a corporate setting? Whose communications to a lawyer
engaged by the corporation are entitled to this protection? In Upjohn Co. v. United States,1500 the
Supreme Court rejected the seemingly objective test that would allow the privilege only to
communications by persons within the corporate control group. The Supreme Court instead applied
a less formulaic approach based upon factors such as whether the communications to the attorney
were otherwise within the scope of the employees duties to the corporation, whether the employees
superiors within the corporation directed the employee to make the communications in order to
assist the attorney in representing the corporation, whether the corporation otherwise kept the
information confidential, and whether the information was otherwise available.
The privilege is, of course, the corporations privilege with respect to communications to a
corporations lawyer. It is not the employees privilege, even if the employee is a member of a
control group (e.g., officer or director).1501 The danger is that the officer may confuse the
corporations privilege with his own privilege, on some misguided notion that the attorney is
1498
Although some committees will not press the issue, some committees have made
strident noises that the privilege will not apply to congressional investigations. See Kalah
Auchincloss, Note: Congressional Investigations and the Role of Privilege, 43 Am. Crim. L. Rev.
165, 179-185 (Winter 2006); Jonathan P. Rich, Note: The Attorney-Client Privilege in
Congressional Investigations, 88 Colum. L.Rev. 145 (1988).
1499
Two prominent examples are the Enron case and the KPMG case, both of which had
major congressional investigations preceding the criminal charges.
1500
449 U.S. 383 (1981).
1501
Commodity Futures Trading Corporation v. Weintraub, 471 U.S. 478 (1986); In re
Grand Jury Subpoenas, 144 F.3d 653, 658 (10th Cir. 1998). Notwithstanding this general
demarcation, the facts may permit at least an argument that, in communicating with the attorney, the
corporate employee thought that the attorney was also acting for him or her personally. In such
cases, some courts have developed a strict test that is often impossible to meet. See In the Matter
of Bevill, Bresler & Schulman Asset Management Co., 805 F.3d 120,123 (3d Cir. 1986); U.S. v.
International Brotherhood of Teamsters, 199 F.3d 210, 215 (2d Cir. 1997); In re Grand Jury
Proceedings, 156 F.3d 1038, 1040 (10th Cir. 1998); In re Grand Jury Subpoena, 274 F.3d 563, 572
(1st Cir. 2001).
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somehow also the attorney for the officer or director. And, so long as the officer is in the control
group, he or she may have some assurance that the corporation will assert the privilege, thus
protecting the officers communications to the attorney, but if the officer is not within the group or
leaves the group (e.g., by leaving the corporation, willingly or not so willingly), the then former
officer may find that the new control group is not so interested in asserting a privilege to help the
former officer.1502
This phenomenon is aptly shown in the recent accounting scandals (Enron, et al.).
Corporations appear increasingly willing to trade their privileges for more favorable treatment by
prosecutors investigating or prosecuting the corporations misdeeds through its officers, usually
former officers. Often, because of the Governments prosecution policies for corporations, the
Government will be reluctant to charge the corporation because the inevitable effect will be to
further harm shareholders or other innocent employees or interested parties that have already been
burned by the underlying fraudulent conduct. In order to encourage the Government not to
prosecute the corporation, the corporation may be required to waive the privileges (attorney-client,
as well as the work product privilege) that might otherwise apply with respect to the underlying
conduct.1503 Furthermore, in the event the corporation is charged, its sentencing will be reduced
when it discloses all pertinent information.1504 In short, officers of corporations take substantial risk
in undertaking risky behavior that the corporation will not act to protect them.
One of the side effects of the corporations waiver of the attorney-client privilege in order
to curry favor with the prosecutors is, to state the obvious, it has waived the privilege. For the
attorney-client privilege, any waiver is a waiver in all contexts. Thus, for example, corporations
have made disclosures of attorney-client privileged information to the Government subject to a
reservation of the privilege; courts have rejected the reservation of the privilege, saying that if that
nuance is to be recognized, Congress rather than the courts must do it.1505 Of course, as in other
1502
See e.g., Commodity Futures Trading Corporation v. Weintraub, supra.

It is important in this regard to differentiate between such privileges that arose
contemporaneously while the underlying fraud was being committed and those that arise because
of representation in the investigation or prosecution of the underlying fraud. The prosecutor may
request and receive a waiver of both the work product and attorney-client privileges arising
contemporaneously with the conduct being investigated or prosecuted, but would usually only ask
waiver of the work product privilege with respect to privileges arising during the investigative or
prosecutive stage.
1504
Sentencing Guidelines 8C2.5.
1505
United States v. Thompson, 562 F.3d 387 (D.C. Cir. 2009) (discovery in a criminal
case of the results of internal investigations produced to the Government under a selective waiver;
discovery required subject to the traditional limited criminal discovery rules such as Brady, Jencks
Act, etc.)); see also In re Qwest Communications Int'l, Inc. 450 F.3d 1179 (10th Cir. 2006) (civil
litigants' access to privileged material produced to government under a selective waiver).
1503
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areas where the attorney-client privilege fails, the proponent may still be able to assert work product
privilege which is not subject to the unconditional waiver rule.1506
b.
Problems in Internal Investigations.
Delicate issues regarding the attorney-client provisions can arise in any setting where a
person may be confused as to whether the lawyer is representing him or her. This is often
encountered in the corporate setting, particularly with respect to internal investigations into actions
that may have criminal aspects. The entity, often a corporation but other types of entities are
included, may have an outside legal team conduct the investigation pursuant to an appropriate
attorney-client privilege with the corporation. As noted above, under Upjohn, that privilege may
extend to certain high-level officers. But, within its normal contours, it would not apply to many
of the persons within the entity that would be interviewed within the scope of the internal
investigation. But, in order to avoid confusion in the employees mind (thus potentially affecting
his or her valuable right to remain silent), the better part of wisdom is for the attorney conducting
the internal investigation to warn the employee at the outset that the attorney represents the entity
and not that individual being interviewed. This warning is commonly referred to as an Upjohn
warning, for reasons that should be obvious. Indeed, the Upjohn warning, properly given, can be
quite elaborate with several components, which in the aggregate is often referred to in the plural as
Upjohn warnings, so I use the plural here.1507
The Upjohn warnings are particularly important for three reasons. First, most obviously, is
to put the interviewee on clear notice that the attorney doing the interview is not the interviewees
attorney and therefore the interviewee cannot rely upon the attorney to protect his or her interests
or to keep the statements confidential. Second, and related, the lawyer ethically is bound to make
sure the interviewee understands that the lawyer is not representing him or her. Third, although the
statements would be at least attorney work product and, in context, even confidential attorney-client
communications as to the entity, the entity can make the choice to waive any protections afforded
by the attorney-client or work product privileges. Indeed, as noted above, in many criminal
investigations where the entity is a potential target, there may be great pressure on the entity to
waive these privileges and even where the prosecutor may not be formally exerting the pressure, the
entity could believe that waiving the privileges would be in its best interests. The employees
statements could then be delivered up to the prosecutors on a silver platter and be used against the
employee. But, by the same token, a prosecutors ability to use the statements may be compromised
if the interview had not been properly warned that the interviewing attorneys were not representing
1506
Id at p. 394 (noting, however, that such selective disclosure of work product might
still be a waiver if the circumstances of the disclosure is inconsistent with the maintenance of the
privilege.
1507
See particularly Upjohn Warnings: Recommended Best Practices When Corporate
Counsel Interact with Corporate Employees (7/17/09) (published by ABA WCCC Working Group),
which may be found at:
http://new.abanet.org/sections/criminaljustice/CR301000/PublicDocuments/ABAUpjohnTaskFor
ceReport.pdf
- 626 -
him or her1508 and, where there is murkiness about whether the proper warning had been given, the
entitys bargaining power with the prosecutor may be compromised.
3.
The Limits of the Privilege.

a.
Identity Privilege.
The question considered here is whether the clients identity is covered by the attorney-client
privilege. The question arises in several contexts, such as the filing of the lawyers filing of a
currency transaction report with respect to receipt of cash from a client or, more recently, in
identifying clients engaged in tax shelter transactions.
United States v. BDO Seidman, 337 F.3d 802 (7th Cir. 2003), reh. en banc
denied, cert. denied sub nom. Roes v. United States, 124 S. Ct. 1410 (2004).
[The IRS issued 20 regular IRS summonses to BDO Seidman, a large accounting firm that
had allegedly marketed tax shelters. The IRS summonsed information and documents related to the
tax shelters and the persons investing in the shelters. The IRS used the regular summons rather than
the John Doe Summons. When the accounting firm failed to comply, the Government brought a
summons enforcement proceeding. The clients anonymously sought to intervene to protect their
identities from being disclosed. The clients asserted the new federally authorized tax practitioner
privilege ( 7525), which parallels the attorney-client privilege1509 and urged, under attorney-client
privilege principles, the client identity privilege applied.]
Before us, the only factor that the IRS disputes is whether the Does satisfied
their burden of demonstrating a legally protectable interest in preventing the
disclosure of the documents that would reveal their identities as individuals who
sought BDO's advice regarding tax shelters.
****
1508
For a dramatic instance where an employee, a CEO of the company, suffered this
fate, see United States v. Ruehl, 583 F.3d 600 (9th Cir. 2009). In that case, the trial court found that
the investigating attorneys had not properly warned the CEO that it was not representing him with
respect to the interviews and even referred the attorneys to the state bar for ethical violations. The
court of appeals pulled the fat out of the fire to permit the Governments use of the statements in
prosecution because, under the circumstances, it found that the CEO had not made the statements
with an understanding of confidentiality.
1509
See p. 621, supra.
- 627 -
A. A Colorable Claim of Privilege

The primary issue before us is whether the district court erred when it denied
the Does' motions to intervene because it believed that they had failed to establish
a colorable claim of privilege under section 7525. * * * *
1. Regulatory Context
We first consider the regulatory context in which the Does' claim of privilege
arises. The Does sought to intervene in proceedings involving the IRS investigation
of BDO for potential violations of the tax code, including the provisions requiring
organizers of tax shelters to register tax shelters with the IRS, 26 U.S.C. section
6111, and organizers and sellers of such shelters to keep lists of the investors, 26
U.S.C. section 6112. These provisions were enacted by Congress as part of the
Deficit Reduction Act of 1984, Pub. L. No. 98-369, 98 Stat. 494 (1984), for the
purpose of providing the IRS with means to better monitor tax shelters, and,
consequently, to deter abusive tax shelters that can adversely impact public revenues.
* * * * The statutory registration and list-keeping provisions allow the IRS to
identify more easily those transactions that it deems to be abusive and to identify
quickly all of the participants in related tax-shelter investments. * * * *
[Discussion of scope of the summons authority omitted]
2. 26 U.S.C. section 7525
Having described the general framework of this regulatory authority, we now
turn to the specific context of the Does' claim. The Does seek to intervene to prevent
the disclosure, through IRS summonses, of documents that the Does contend are
privileged. The Does' privilege claim rests entirely on section 7525, a statute enacted
on July 22, 1998, to provide a confidentiality privilege for communications between
a taxpayer and a tax practitioner. This limited privilege applies only to
communications occurring after the date of the statute's enactment. See Frederick,
182 F.3d at 502. Section 7525, provides in pertinent part:
With respect to tax advice, the same common law protections of
confidentiality which apply to a communication between a taxpayer and an
attorney shall also apply to a communication between a taxpayer and any
federally authorized tax practitioner to the extent the communication would
be considered a privileged communication if it were between a taxpayer and
an attorney.
26 U.S.C. section 7525(a)(1). Thus the section 7525 privilege is no broader than that
of the attorney-client privilege, and [n]othing in [section 7525] suggests that . . .
nonlawyer practitioners are entitled to privilege when they are doing other than
- 628 -
lawyers' work. Frederick, 182 F.3d at 502. Because the scope of the tax
practitioner-client privilege depends on the scope of the common law protections of
confidential attorney-client communications, we must look to the body of common
law interpreting the attorney-client privilege to interpret the section 7525 privilege.
The attorney-client privilege is one of the oldest recognized privileges for
confidential communications known to the common law. [Citation omitted.] The
purpose of the privilege is to encourage full disclosure and to facilitate open
communication between attorneys and their clients. Id. However, because the
privilege has the effect of withholding relevant information, courts construe the
privilege to apply only where necessary to achieve its purpose. [Citations omitted.]
The mere assertion of a privilege is not enough; instead, a party that seeks to invoke
the attorney-client privilege has the burden of establishing all of its essential
elements. [Citations omitted.]
A party that seeks to assert a section 7525 privilege bears the same burden.
Among the essential elements of the attorney-client privilege are the requirements
that the communication be made to the attorney in confidence, [Citation omitted],
and that the confidences constitute information that is not intended to be disclosed
by the attorney, [Citations omitted]. Furthermore, the party asserting a privilege must
show that the attorney-client communication was made for the purpose of obtaining
legal advice, or, more precisely in the case of the section 7525 privilege, tax advice.
[Citation omitted.]
The attorney-client privilege protects confidential communications made by
a client to his lawyer, and so ordinarily the identity of a client does not come within
the scope of the privilege. [Citation omitted.] However, over the years, a limited
exception to this general rule has developed; the identity of a client may be
privileged in the rare circumstance when so much of an actual confidential
communication has been disclosed already that merely identifying the client will
effectively disclose that communication. [Citations omitted.]
In their discussion of this narrow exception, the parties primarily focus on
two cases in which we held that attorney-client privilege could prevent the disclosure
of a client's identity. In Tillotson, an unidentified taxpayer had determined that he
understated his tax liability on previously filed returns and retained an attorney to
deliver a cashier's check in the amount of $215,499.95 to the IRS. 350 F.2d at
663-65. The IRS sought to enforce a summons it had served on the attorney,
demanding that he testify about his client. The attorney asserted the attorney-client
privilege and refused to disclose his client's identity. Id. We upheld the invocation
of the privilege because under the peculiar facts of this case, the attorney-client
privilege includes, within its scope, the identity of the client. Id. at 665. We
reasoned that the IRS had become aware of the substantive content of the
confidential communication between the unknown taxpayer and his attorney -Townsend on Federal Tax Crimes (2013 ed. 01)
- 629 -
namely, the taxpayer's tax liability -- the moment the cashier's check was delivered.
Because revealing the taxpayer's identity would also reveal the content of the
confidential communication, the privilege attached. Id. at 666. Similarly, in Cherney,
we held that the privilege encompasses the identity of a client when the Government
knows that the unidentified client paid fees for a criminal defendant out of concern
about his own involvement in the charged drug conspiracy. 898 F.2d at 568. In that
case, we explained, the client's identity was privileged because its disclosure would
be tantamount to revealing the premise of a confidential communication: the very
substantive reason that the client sought legal advice in the first place. Id. In other
words, the privilege protects an unknown client's identity where its disclosure
would reveal a client's motive for seeking legal advice. Id.; see In re Subpoenaed
Grand Jury Witness, 171 F.3d at 514; Tillotson, 350 F.2d at 666.
Relying on these cases, the Does submit that the IRS' summonses set forth
such detailed descriptions about suspect types of tax shelters under investigation that
any document produced in response that also reveals a client's identity will inevitably
reveal that client's motivation for seeking tax advice from BDO. The Does define
their motive for retaining BDO's services as the desire to engage in financial
transactions which the government might later decide to be questionable, or . . .
'potentially abusive.' Appellants' Br. at 16. Because a client's motive for seeking
legal advice is considered a confidential communication, the Does contend that the
section 7525 privilege should protect against the disclosure of their motive for
seeking tax advice, a motive that would be known if their identities are revealed.
The Does have not established that a confidential communication will be
disclosed if their identities are revealed in response to the summonses. Disclosure of
the identities of the Does will disclose to the IRS that the Does participated in one
of the 20 types of tax shelters described in its summonses. It is less than clear,
however, as to what motive, or other confidential communication of tax advice, can
be inferred from that information alone. Compared to the situations in the Tillotson
and Cherney cases, where the Government already knew much about the substance
of the communications between the attorney and his unidentified client, in this case
the IRS knows relatively little about the interactions between BDO and the Does, the
nature of their relationship, or the substance of their conversations. Moreover, the
Does concede that the documents that BDO intends to produce in response to the
summonses are not subject to any other independent claim of privilege beyond the
Does' assertion of privilege as to identity.
More fundamentally, the Does' participation in potentially abusive tax
shelters is information ordinarily subject to full disclosure under the federal tax law.
See 26 U.S.C sections 6111, 6112. Congress has determined that tax shelters are
subject to special scrutiny, and anyone who organizes or sells an interest in tax
shelters is required, pursuant to I.R.C. section 6112, to maintain a list identifying
each person to whom such an interest was sold. This list-keeping provision precludes
- 630 -
the Does from establishing an expectation of confidentiality in their communications

with BDO, an essential element of the attorney-client privilege and, by extension, the
section 7525 privilege. [Citation omitted] At the time that the Does communicated
their interest in participating in tax shelters that BDO organized or sold, the Does
should have known that BDO was obligated to disclose the identity of clients
engaging in such financial transactions. Because the Does cannot credibly argue that
they expected that their participation in such transactions would not be disclosed,
they cannot now establish that the documents responsive to the summonses, which
do not contain any tax advice, reveal a confidential communication. Thullen, 220
F.3d at 571 (a communication must be made in confidence to be privileged under
section 7525).
BDO's affirmative duty to disclose its clients' participation in potentially
abusive tax shelters renders the Does' situation easily distinguishable from the
limited circumstances in which we have determined that a client's identity was
information subject to the attorney-client privilege. The district court committed no
error when it concluded that the Does failed to establish a colorable claim of
privilege under section 7525.
Conclusion
Because the Does cannot demonstrate a colorable claim of privilege, they
have failed to establish a legally protectable interest in preventing the disclosure of
the documents revealing their identities as individuals who participated in tax
shelters promoted by the BDO. For the reasons stated above, the district court's
judgments denying the Does' motions for intervention are affirmed.
AFFIRMED
------------------- END OF CASE ------------------Note that the intervener relied exclusively on 7525 as a basis for withholding the
documents and information. Section 7525 does not apply in a criminal investigation. The
investigation at hand was not a criminal investigation, however. Does 7525 encourage the IRS
to start a criminal investigation to avoid this potential impediment to information gathering?
In Reiserer v. United States, 479 F.3d 1160 (9th Cir. 2007), the IRS investigated a lawyers
tax shelter activity and issued a summons for the identity of the lawyers clients. As did the BDO
Seidman Court, the Ninth Circuit reviewed the broad scope of the IRSs ability to use the IRS
summons to investigate and rejected the claim of attorney-client privilege for client identity. The
Ninth Circuit, however, acknowledged an exception, not applicable in the case, where the clients
identify would constitute an acknowledgment of the guilt of the offense that led the client to seek
legal assistance in the first place.
- 631 -
b.
Crime-Fraud Exception.
Another exception to the attorney-client privilege is the so-called crime-fraud exception.

The concept is that the attorney-client privilege and work product privilege do not apply where the
communication or work product is in furtherance of a crime.1510 Some courts do not limit the
exception to just crime, but seem to expand it to situations involving intentional torts or other
misconduct.1511 The party seeking to invoke the exception usually the Government in a criminal
case1512 bears the burden of establishing that this exception applies to otherwise privileged
communications or work product.1513 Although the issue is not yet resolved among the Circuits, the
Third Circuit recently held that, in the context of a grand jury subpoena, the Government must show
a reasonable basis to suspect that the communication was in furtherance of a crime; that showing,
perhaps like probable cause, the Court said is not a particularly heavy one and is certainly less
than a preponderance of the evidence.1514
Once the exception applies, however, the further question is the scope of the limitation i.e.,
does it apply to all attorney-client communications or to all work product or only that portion of
either reasonably related to the furtherance of crime? After a careful review of the authority, the
Fifth Circuit recently concluded that the proper reach of the crime-fraud exception when applicable
does not extend to all communications made in the course of the attorney-client relationship, but
rather is limited to those communications and documents in furtherance of the contemplated or
ongoing criminal or fraudulent conduct.1515 And, an anonymous cementer on my Federal Tax
Crimes Blog added the following points:
1510
United States v. Edwards, 303 F.3d 606, 618 (5th Cir. 2002); and In Re: Grand Jury
John Doe 1; John Doe 2; ABC Corporation, ___ F.3d ___, 2012 U.S. App. LEXIS 25318 (3d Cir.
2012). The leading Supreme Court case on the exception is United States v. Zolin, 491 U.S. 554
(1989); see also Clark v. United States, 289 U.S. 1, 15 (1933).
1511
United States v. Zolin, 492 U.S. 554, 562 (1989); Diamond v. Stratton, 95 F.R.D. 503
(S.D.N.Y. 1982); and In re Sealed Case, 754 F.2d 395 (D.C. Cir. 1985).
1512
This is not always so, however. In Tri-State Hospital Supply Corp. v. United States,
238 F.R.D. 102 (D. D.C. 2006), relying on cases that expand the exception to situations misconduct
beyond crimes, the plaintiff who had succeeded in prosecution brought by DOJ brought malicious
prosecution claim against the United States and sought documents over which the Government
claimed attorney-client privilege. Although the magistrate did not accept the argument, it also did
not reject it. Ultimately, it is reported that the magistrate rejected the claim because the facts
presented did not make out a prima facie case of malicious prosecution. See Janice Mac Avoy &
and Philip A. Wellner, Subtle Shifts on Attorney-Client Privilege, NYLJ (Special Section on
Litigation 4/3/07).
1513
Id.
1514
In Re: Grand Jury John Doe 1; John Doe 2; ABC Corporation, ___ F.3d ___, 2012
U.S. App. LEXIS 25318 (3d Cir. 2012).
1515
In re Grand Jury Subpoena, 419 F.3d 329 (5th Cir. 2005).
- 632 -
1. In this, as in other recent cases, counsel's ignorance of a client's intended wrongs

does not mean the crime-fraud exception does not apply since this exception is
governed by the client's intention. Indeed, counsel's knowledge or belief about a
client's intended wrongs are, for the most part, irrelevant.
2. Although this was a criminal case, it seems likely that the 5th. Circuit would have
readily taken the same approach to a civil case.
3. While the court found that the government had not substantiated its demand for
access to the entire file, it may well be that, on further post-remand proceedings, the
government's burden in such circumstances would not be impossible to meet.
4.
Legal v. Tax Preparation Work.
In the cases we explore now, the dividing line between a lawyers work and an accountants
work may be blurred. The outer parameters are clear. There is an attorney-client privilege. There
is no accountant-client privilege. This raises the issue of whether client communications to an
attorney who uses the communications to prepare a tax return qualify for the attorney-client
privilege whereas such communications to an accountant who prepares a tax return are not (setting
aside for the moment the effect, if any, of 7525). Specifically, the question raised is whether the
attorney in this situation is performing legal work which at least facially qualifies for the privilege
is doing nonlegal work which does not qualify for the privilege.
In United States America; Whites v. Bornstein, 977 F.2d 112 (4th Cir. 1992), the IRS
summonsed workpapers from Bornstein, both a lawyer and an accountant, who had been initially
engaged as return preparer. After an IRS investigation of the clients returns commenced, the clients
came to Bornstein as a lawyer for assistance. All of the work that Bornstein thereafter performed
was as a lawyer. Bornstein had an accountant in his firm prepare worksheets summarizing relevant
information from preexisting documents. Bornstein then prepared the current year return and, as
to the source of income reported on the return, claimed the Fifth Amendment privilege. The IRS
then summonsed Bornstein for his records. Bornstein refused to produce any documents relating
to the source of the income, including the preexisting documents and the accountants workpapers,
on the ground that the attorney-client privilege protected the documents from disclosure. Bornstein
also refused to answer any questions relating to the source of that interest income.
The IRS then moved to enforce the summons. Bornstein resisted and requested that the court
review the documents in camera to determine the proper assertion of the privilege. The IRS simply
ignored the possibility of in camera review, asserting the broad argument that accountants
workpapers are not privileged. At the hearing, the parties addressed only the issue of whether
taxpayers had waived any privilege simply by reporting the amount of the income.
The Court of Appeals addressed the issues and problems as follows:
Bornstein contends that the IRS waived the document-by-document, in
camera review issue by not raising it below. At oral argument to this court, the IRS
conceded that it never requested the district court to make such a review. Instead, the
- 633 -
IRS only cited cases in its memorandum to the district court that, upon examination,
supported the IRS position on appeal. * * * * The IRS cited those cases to support
its argument that the accountants workpapers were not privileged, not in support of
document-by-document review of the preexisting documents.
****
The principal evil that the document-by-document rule seeks to curtail is the
blanket privilege claim, that is, a broad, undifferentiated claim that all summoned
documents are protected from disclosure. * * * *
This court has not had the occasion to consider the document-by-document
rule. * * * * Two affidavits, Bornsteins and Sevillas, support Bornsteins
allegations. Bornsteins affidavit sets out very detailed facts that specified the
privilege he claimed (attorney-client), established all the elements of that privilege,
and identified the general nature of the withheld documents. * * * *. The only
arguable deficiency in Bornsteins affidavit is that he did not reveal how many
preexisting documents there were. * * * *. In that sense, Bornstein did not make the
required document-by-document claim of privilege. However, Bornstein clearly
identified the nature of the preexisting documents. He also produced all the other
documents the IRS summons called for, (except for the accountants workpapers),
including documents related to the Sevilla-Sacasas 1986 and 1987 tax returns, and
documents related to the 1988 return for which he did not claim a privilege.
Therefore, this case in no way involves the blanket assertion of privilege that
courts uniformly disallow. We hold that when, as here, a party asserting the
attorney-client privilege against a tax summons sets out specific facts establishing
the elements of the privilege and detailing the general nature of the withheld
documents, there is no plain error if the district court fails to make a sua sponte,
document-by-document finding of the privileges applicability.
We next consider whether there is a miscarriage of justice in finding that the
IRS waived the document-by-document, in camera issue. Bornsteins memorandum
suggested several times that the district court could view the documents in camera,
but the IRS memorandum never responded to that argument. When the district court
considered holding an in camera proceeding during the enforcement hearing, the IRS
attorney opposed it. While that opposition concerned the issue of whether Sevilla had
acted as his parents agent, earlier in the hearing Bornsteins attorney had suggested
an in camera proceeding for other purposes. * * * *. The IRS attorney thus had the
opportunity then, as well as later in the hearing, to request the district court to make
a document-by-document, in camera examination, but did not do so. Under these
circumstances, with the IRS attempting to change its position on appeal after having
had ample opportunity to raise the document-by-document issue below, there is no
miscarriage of justice in holding that the IRS waived this issue as to the preexisting
documents, and we do so hold.
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Next, we consider the accountants workpapers. The IRS addressed the

accountants workpapers in its memorandum to the district court, and Bornstein does
not argue that the IRS waived its arguments relating to them. Instead, Bornstein
argues that either the attorney-client privilege or the work product doctrine protects
disclosure of the accountants workpapers. Unfortunately, the district court
completely failed to address the accountants workpapers in its ruling, and we
therefore find it necessary to remand the case for the district court to determine at an
evidentiary hearing whether either the attorney-client privilege or the work product
doctrine protects the accountants workpapers. Bornstein will bear the burden of
proving that either applies. See, e.g., United States v. Powell, 379 U.S. 48, 58 * * *
(1964).
In deciding whether the attorney-client privilege applies, one determination
the district court must make is whether Bornstein in fact had Fig prepare the
accounting workpapers in order for Bornstein to give the Sevilla-Sacasas legal
advice, rather than accounting advice. * * * * Preparation of tax returns is primarily
an accounting service, not a legal one, and accounting services are ordinarily not
privileged. * * * * However, accounting services performed ancillary to legal
advice may be within the attorney-client privilege. Preparation of tax returns may in
some circumstances come within this category. . . . Id. at 1043 n.17. Ordinarily,
though, the attorney-client privilege does not attach to tax work prepared by
accountants unless the accountant is translating complex tax terms into a form
intelligible to a lawyer at the lawyers behest. * * * * Since Bornstein is himself an
accountant, it is not immediately apparent how Figs accounting services made
complex tax terms . . . intelligible to Bornstein or helped Bornstein give legal
advice. On remand, the appropriate inquiry that we have culled from the caselaw is
whether the accountants workpapers were produced more for the benefit of
Bornstein the lawyer or more for the benefit of Bornstein the accountant/tax preparer,
that is, whether the accounting services were performed primarily to allow Bornstein
to give legal advice. * * * * We realize that this is a difficult line to draw, especially
in this case, and the existing record is inadequate for this court to make the
determination. The district court may need to view the workpapers in camera or take
in camera proffers in order to decide the issue. The determination of whether the
work product doctrine applies to the accountants workpapers is more easily defined.
On remand, the district court must decide initially whether the accountants
workpapers were prepared in anticipation of litigation and not in the ordinary course
of business, after considering whatever memoranda or evidence the court deems
necessary. * * * *. Again, the existing record is too sparse to allow this court to make
the determination of whether the work-product doctrine applies.
Here are some questions to think about:
1.
Was Mr. Bornstein wearing too many hats? He was an accountant and an attorney.
There is nothing per se wrong with that except when the roles may be confused. Keep in mind that,
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for the attorney-client privilege to apply, the attorney must be acting in the capacity as an attorney
and not in any other non-privileged capacity. Would it have been better to have separate and
independent counsel engaged once the IRS began its inquiries? Keep in mind that Mr. Bornstein
might well be a necessary witness by virtue of the work he did on the 1986 return and his firm did
on the 1987 return. One obvious question he could be asked under the facts is whether he was
advised that the client had interest income from the unnamed source. Then, he would have to testify
as to that subject because, at the time, he was apparently acting solely as a return preparer which the
court intimates would not be subject to the attorney-client privilege. If he admits that the client told
him about the interest, then he is in trouble for not putting it on the return; conversely, if he denies
the client told him about the interest, he has just damaged his clients case. He would have to give
that testimony anyway, but it is particularly troublesome when it comes from the attorney currently
representing the client.
2.
Consider the following fix. Upon the IRSs initial inquiry, Mr. Bornstein
recommends that the taxpayers engage you as an independent attorney. Then two types of work
needs to be done. The defense of the 1986 and 1987 audit and the preparation and filing of the 1988
return. You engage a new accountant to assist in the 1986 - 1987 audit. You engage still another
accountant to prepare the 1988 return. You give all of the information and documents necessary for
the 1988 return to the new accountant preparing the return except that you give that accountant only
the amount of the interest on the accountant and direct that the accountant assert the privilege with
respect to the source of the interest. What are the good and bad points of this fix?
Now consider the following opinion in United States v. Frederick,1516 where the summonsed
party was both an accountant and a lawyer:
Posner, Chief Judge. These appeals challenge an order enforcing summonses
that the Internal Revenue Service issued to Richard Frederick. Frederick is both a
lawyer and an accountant, and he both provides legal representation to, and prepares
the tax returns of, Randolph and Karin Lenz and their company, KCS Industries, Inc.
The IRS is investigating the Lenzes and their company, and the summonses directed
Frederick to hand over hundreds of documents that may be germane to the
investigation. Frederick balked at handing over all of them, claiming that some were
protected by either the attorney-client privilege or the work-product privilege (or
both). His refusal precipitated this enforcement proceeding. 26 U.S.C. 7604(b).
The district judge examined the documents in camera and ruled that some were
privileged but others were not. The appeals challenge the latter ruling.
As is generally though not always the case when an appeal challenges the
application of a legal rule to the facts (sometimes called a ruling on a mixed
question of fact and law, * * *, our review of the judges ruling on the privilege
claims is deferential; we ask not whether the ruling was erroneous but whether it was
clearly erroneous, * * *, just as when we are reviewing simple factfindings. Fed. R.
Civ. P. 52(a). Whether a particular document is privileged is a fact-specific and
1516
182 F.3d 496 (1999).
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case-specific issue, the sort of issue that district judges are particularly experienced
in resolving. It is not the sort of issue that lends itself to governance by a uniform
rule that a court of appeals might prescribe and enforce. In these circumstances, a
light appellate touch is best.
This is generally the case when the issue on appeal is whether the trial court
or jury correctly applied a rule of law to the facts. Such an issue is fact- and
case-specific, and so does not lend itself to uniform resolution across different cases,
the sort of resolution that requires plenary appellate review. That is why we said in
the preceding paragraph that generally the standard for reviewing such issues is
deferential. Generally is not always, and the exceptions, illustrated by Ornelas, are
important. But the only exceptions the Supreme Court has carved are for certain
constitutional issues, where the risk of error is thought sufficiently serious to warrant
a more searching than normal review for error, and in this circuit, at least, we have
been reluctant to recognize exceptions outside the constitutional area. Other courts
have not been so austere; it is easy to cite a string of cases in which a court describes
the standard of review for a mixed question of nonconstitutional law and fact, such
as fair use in a copyright case or likelihood of confusion in a trademark case; but we
are not aware of any case which explains why such an issue requires plenary review,
and we cannot think of any respect bearing on the optimal standard of review in
which any of these issues differs from the issue of privilege in this case. The
presumption in this circuit is and we hope will remain that the clear-error standard
is the proper standard for appellate review of determinations of mixed questions of
fact and law. This presumption is a helpful simplification of the law of appellate
review, with no downside that we can see; and there is certainly nothing in the
circumstances of the present case, or the class of cases that it exemplifies
(nonconstitutional privilege cases), to rebut it.
Most of the documents in issue were created in connection with Fredericks
preparation of the Lenzes tax returns. They are drafts of the returns (including
schedules), worksheets containing the financial data and computations required to
fill in the returns, and correspondence relating to the returns. These are the kinds of
document that accountants and other preparers generate as an incident to preparing
their clients returns, or that the taxpayers themselves generate if they prepare their
own returns, though in the latter case there is unlikely to be correspondence. The
materiality of the documents to the IRSs investigation of the Lenzes is not in issue.
There is no common law accountants or tax preparers privilege, * * *, and
a taxpayer must not be allowed, by hiring a lawyer to do the work that an accountant,
or other tax preparer, or the taxpayer himself or herself, normally would do, to obtain
greater protection from government investigators than a taxpayer who did not use a
lawyer as his tax preparer would be entitled to. * * * *. To rule otherwise would be
to impede tax investigations, reward lawyers for doing nonlawyers work, and create
a privileged position for lawyers in competition with other tax preparers--and to do
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all this without promoting the legitimate aims of the attorney-client and
work-product privileges. The attorney-client privilege is intended to encourage
people who find themselves involved in actual or potential legal disputes to be
candid with any lawyer they retain to advise them. * * * *. The hope is that this will
assist the lawyer in giving the client good advice (which may head off litigation,
bring the clients conduct into conformity with law, or dispel legal concerns that are
causing the client unnecessary anxiety or inhibiting him from engaging in lawful,
socially productive activity) and will also avoid the disruption of the lawyer-client
relationship that is brought about when a lawyer is sought to be used as a witness
against his client. The work-product privilege is intended to prevent a litigant from
taking a free ride on the research and thinking of his opponents lawyer and to avoid
the resulting deterrent to a lawyers committing his thoughts to paper. * * * *.
Communications from a client that neither reflect the lawyers thinking nor
are made for the purpose of eliciting the lawyers professional advice or other legal
assistance are not privileged. The information that a person furnishes the preparer of
his tax return is furnished for the purpose of enabling the preparation of the return,
not the preparation of a brief or an opinion letter. Such information therefore is not
privileged.
We do not, however, accept the governments argument that there is no issue
of privilege here because the information was transmitted to a tax preparer with the
expectation of its being relayed to a third party, namely the IRS. It is true that if the
client transmitted the information so that it might be used on the tax return, such a
transmission destroys any expectation of confidentiality. * * * *. That is, the
transmittal operates as a waiver of the privilege. But the tax preparer here was also
the taxpayers lawyer, and it cannot be assumed that everything transmitted to him
by the taxpayer was intended to assist him in his tax-preparation function and thus
might be conveyed to the IRS, rather than in his legal-representation function. * * *
*.
We also reject the governments argument that numerical information can
never fall within the attorney-client or work-product privilege. * * * *. Such cases
are rare, but they can be imagined. Suppose a lawyer prepared an estimate of his
clients damages; the estimate would be numerical, but insofar as it reflected the
lawyers professional assessment of what to ask the jury for it would be attorney
work product. Similarly, if the lawyer asked his client how much he had obtained in
the theft for which he was being prosecuted and the client answered, $10,000, the
answer would be protected by the attorney-client privilege. But we do not agree
with the appellants that the district judge based his ruling on the erroneous view that
numbers can never be privileged. He found no basis for privileging these numbers,
remarking, rightly, It cannot be argued that numbers in the hands of the accountant
are different from numbers in the hands of a lawyer.
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Besides the information supplied to Frederick by the Lenzes, there are the
worksheets, which Frederick prepared and which doubtless reflect some of his own
thinking. But the Supreme Court has held that an accountants worksheets are not
privileged, United States v. Arthur Young & Co., supra, 465 U.S. at 817-19, and a
lawyers privilege, as we explained earlier, is no greater when he is doing
accountants work. A complicating factor is that when Frederick was doing these
worksheets and filling out the Lenzes tax returns, he knew that the IRS was
investigating the Lenzes and their company, albeit in connection with different tax
years, and he was representing them in that investigation. But people who are under
investigation and represented by a lawyer have the same duty as anyone else to file
tax returns. They should not be permitted, by using a lawyer in lieu of another form
of tax preparer, to obtain greater confidentiality than other taxpayers. By using
Frederick as their tax preparer, the Lenzes ran the risk that his legal cogitations born
out of his legal representation of them would creep into his worksheets and so
become discoverable by the government. The Lenzes undoubtedly benefited from
having their lawyer do their returns, but they must take the bad with the good; if his
legal thinking infects his worksheets, that does not cast the cloak of privilege over
the worksheets; they are still accountants worksheets, unprotected no matter who
prepares them.
Put differently, a dual-purpose document--a document prepared for use in
preparing tax returns and for use in litigation--is not privileged; otherwise, people in
or contemplating litigation would be able to invoke, in effect, an accountants
privilege, provided that they used their lawyer to fill out their tax returns. And
likewise if a taxpayer involved in or contemplating litigation sat down with his
lawyer (who was also his tax preparer) to discuss both legal strategy and the
preparation of his tax returns, and in the course of the discussion bandied about
numbers related to both consultations: the taxpayer could not shield these numbers
from the Internal Revenue Service. This would be not because they were numbers,
but because, being intended (though that was not the only intention) for use in
connection with the preparation of tax returns, they were an unprivileged category
of numbers.
The most difficult question presented by this appeal, and one on which we
cannot find any precedent, relates to documents, numerical and otherwise, prepared
in connection with audits of the taxpayers returns. An example is a memo from
Frederick to a paralegal asking her for the amount that Mr. Lenz and his corporation
had paid Frederick for legal services rendered personally to Lenz in 1992. The memo
was prepared to help Frederick respond to questions raised in an audit of the Lenzes
and the corporations tax returns. An audit is both a stage in the determination of tax
liability, often leading to the submission of revised tax returns, and a possible
antechamber to litigation. When a revenue agent is merely verifying the accuracy of
a return, often with the assistance of the taxpayers accountant, this is accountants
work and it remains such even if the person rendering the assistance is a lawyer
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rather than an accountant. Throwing the cloak of privilege over this type of
audit-related work of the taxpayers representative would create an accountants
privilege usable only by lawyers. If, however, the taxpayer is accompanied to the
audit by a lawyer who is there to deal with issues of statutory interpretation or case
law that the revenue agent may have raised in connection with his examination of the
taxpayers return, the lawyer is doing lawyers work and the attorney-client privilege
may attach. But the documents in issue do not, so far as we are able to determine,
relate to such representation.
We should consider the possible bearing of a new statute, 26 U.S.C. 7525,
which extends the attorney-client privilege to a federally authorized tax
practitioner, that is, a nonlawyer who is nevertheless authorized to practice before
the Internal Revenue Service. 7525(a)(3)(A). Nonlawyers (including tax preparers,
many of them accountants) have long been allowed to practice before it. 5 U.S.C.
500(c); 31 C.F.R. 10.3, 10.7(c)(viii). The new statute protects communications
between a taxpayer and a federally authorized tax practitioner to the extent the
communication would be considered a privileged communication if it were between
a taxpayer and an attorney. 7525(a)(1). (It does not protect work product.)
Nothing in the new statute suggests that these nonlawyer practitioners are entitled
to privilege when they are doing other than lawyers work; and so the statute would
not change our analysis even if it were applicable to this case, which it is not,
because it is applicable only to communications made on or after July 22, 1998, the
date the statute was enacted. See Note following 26 U.S.C. 7525.
We have looked at all the documents that Frederick argues are privileged.
Most are dual-purpose documents, about which no more may be said; some were not
even submitted to the district judge for consideration of whether they might be
privileged; in others as well, privilege was waived. We cannot find any clear errors
in the district judges rulings.
Affirmed.
Notes on Frederick
Judge Posner in Frederick takes the traditional approach that the mere presence of an
attorney does not assure the privilege. The attorney must be doing attorney work.1517 Bornstein
adopts a more sophisticated approach. Other courts have occasionally recognized this subtle
distinction. For example, in United States v. Abrahams, 90 F.2d 1276, 1283 (9th Cir. 1990), the
1517
For a case distinguishing a lawyers non-lawyer work (in this case, lobbying) from
his lawyer work, see In re Grand Jury Subpoenas Dated March 9, 2001, 179 F. Supp. 2d 270, 273-74
(S.D.N.Y. 2001). There the lawyers abandoned their traditional legal work to obtain relief for their
client, a fugitive from justice (the infamous Marc Rich), in order to obtain a pardon which they did
successfully. The court said that the seeking of the pardon was not legal work but was rather
lobbying work, to which the attorney-client privilege did not apply.
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Court denied the assertion of privilege because of failure of proof as to the elements, but did note
that Although communications made solely for tax preparation are not privileged, communications
made to acquire legal advice about what to claim on tax returns may be privileged. (Underlining
supplied.)
Analytically, there are really three issues. First, is the advice legal advice? Second, was the
communication intended to be a confidential communication? Third, do the disclosures on the
return itself waive the privilege that might otherwise apply?
Focusing on the first question, there is a considerable area of uncertainty as to what is legal
advice in a return filing context. The classic model, applicable in most cases, is that the return is
prepared by an accountant, enrolled agent or other preparer who is not a lawyer. Per se, therefore
the return filing process is not the seeking or rendering of legal advice, unless we are prepared to
conclude that the whole system of return preparation by non-lawyers is the unauthorized practice
of law. Since non-lawyer return professionals are so critical to the system, that is not an acceptable
conclusion.
We must therefore start with the premise perhaps faulty that return preparation, at least
in the classic model, is not the practice of law and therefore communications between the preparer
and the taxpayer are not within the scope of the attorney-client privilege. It does not follow from
that proposition, however, that no part of the return preparation process is the practice of law.
Obviously, determining return positions whether and how to present uncertain positions
(uncertain based upon a mix of the facts and the law) on a return quacks like the law practice duck.
See Colton v. United States, 306 F.2d 638, 637 (2d Cir. 1982) (There can, of course, be no question
that the giving of tax advice and the preparation of tax returns * * * are basically matters sufficiently
within the professional competence of an attorney to make them prima facie subject to the
attorney-client privilege.) But, as noted, that is not an acceptable position given the importance
of nonlawyer return preparers to the overall tax system.
Do we accommodate this tension by concluding that no part of return preparation the practice
of law? Obviously that is also not an acceptable conclusion.
Lets continue this analysis by setting up a not uncommon situation. Lets assume that a
taxpayer has a complex set of facts and the law applicable to the facts is equally complex. The
accountant who is the return preparer has not a clue as to how the issue would ultimately be resolved
by a court and, more importantly, does not know the legal nuances so as to determine whether the
taxpayer has a favorable return reporting position that would avoid civil and criminal penalties. In
this situation (and many others), it is not uncommon for the taxpayers lawyer to then take the lead
in analyzing the facts and law and determining the return reporting position and then instructing the
accountant as to how to report the position on the return. Is not the lawyer in this example practicing
law in its traditional sense and should not the communications between the lawyer and the client be
privileged? It is true that for civil penalty purposes, the lawyer is the return preparer.1518 But the
1518
Reg. 301.7701-15(b)(1).
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lawyer is still functioning as lawyer for historical attorney-client purposes, and the privilege should
apply. And, the mere fact that the bottom-line return reporting position is disclosed on the return
or disclosed by nondisclosure where the return reporting position is nondisclosure should not mean
that the client has thereby waived the attorney-client privilege.
The new federally authorized tax practitioner (FATP) privilege makes this a serious issue.
That privilege exists for communications between a taxpayer and a nonlawyer practitioner only to
the extent that the communication would qualify as an attorney-client communication if made
between an attorney and his client. This would seem to require that the FATP be practicing law
which, if he or she is not a lawyer, he or she is not authorized to do under state law. Did Congress
perform a meaningless act in 7525? Or, in asserting the 7525 privilege, does the FATP admit
that he or she violated state law prohibitions on nonlawyers practicing law?
The second question is whether the communication was intended to be confidential.
Certainly, as to matters that must be directly disclosed on the return itself, the communication cannot
per se be confidential and there can be no expectation of confidentiality.1519 But does that mean that
communications underlying the information disclosed on the return cannot be confidential?
The third issue is whether, by taking a position on a return, the taxpayer has waived any
privilege he may have. That is like saying that, because a taxpayer takes a position in a court
proceeding based on advice of counsel e.g., file a pleading or brief he has thereby waived his
attorney client privilege. That is absurd.
Precisely for this reason, courts have been reluctant to find a waiver because of legal
positions asserted on a return.1520 To use a specific example, suppose a taxpayer in receipt of income
that is clearly taxable seeks and receives advice of a lawyer that the income is capital gain rather
than ordinary income and reports it that way to his tax benefit, the taxpayer surely has not thereby
waived the attorney-client privilege. Similarly, if a taxpayer seeks and receives advice from his
lawyer that settlement proceeds from a personal injury suit is not taxable under 104 and therefore
does not report the income on his return, he also has not waived his attorney-client privilege. To be
sure, if the IRS were to assert a penalty in good faith and the taxpayers defense to the penalty is that
he or she had good cause because of reliance on counsel, the attorney-client privilege will likely be
deemed waived.1521
If this analysis is correct, should we then be concerned that the IRS will improvidently assert
penalties simply to force a waiver? I guess this is a legitimate concern and that it may actually play
out in particular cases; I doubt however that, systemically, it would be a problem. The truth is that
1519
United States v. Lawless, 709 F.2d 465 (1983).

See e.g. United States v. Cote, 456 F.2d 142 (8th Cir. 1972); United States v.
Schlegel, 313 F. Supp. 177 (D. Neb. 1970); and United States v. Lipshy, 492 F. Supp. 35 (N.D. Tex.
1980).
1521
Johnston v. Commissioner, 119 T.C. 27 (2002).
1520
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now the IRS rarely tries to invade the attorney-client privilege. But, when it happens, it is
tremendously important, so that is why we worry.
The IRSs reluctance to press too far in this area the exercise of good judgment accounts
for the relative dearth of law fully explicating the real policy concerns.
5.
Kovelizing.
In delivering legal services, an attorney will often need the assistance of nonlawyers who
will become privy to confidential information. At its most basic level, non-attorney personnel in
the lawyers firm paralegals and other assistants, secretaries, etc. will become privy to the
information. Disclosures of such information to these personnel will not constitute a waiver of any
privileges that may otherwise apply. Often, however, the attorney will find it helpful in delivering
services to engage personnel outside the firm. For example, often in a tax engagement, an attorney
will hire an outside accountant to assist the lawyer in delivering legal services to the client. The
lawyer may want the accountant to meet with the client and obtain information directly from the
client, and cloak that information in the attorney-client privilege just as if the lawyer obtained it
directly rather than through the accountant. The traditional method by which that is done, at least
in a tax practice, is through an arrangement whereby the lawyer engages the outside personnel
accountant in the present example to become part of the team delivering legal services to the
client.
This procedure was approved early on in a case called United States v. Kovel, 296 F.2d 918
(2d Cir. 1961), and it is now commonly called a Kovel engagement. Here, as in many areas of the
law, it is imperative to do it and do it right.1522
The Kovel arrangement is just a logical subset of the attorney-client privilege. So, its
parameters are set by the attorney-client privilege discussed above. However, keep the following
key points in mind in using the arrangement:
First, it is better form for the attorney to engage the Kovel expert rather than having the client
do so. Some cases will honor the Kovel claim for client-engaged experts,1523 but establishing the
required nexus between the Kovel expert and the attorney can be dicier where the attorney is not
involved in the engagement. The better part of wisdom is to avoid this issue by doing it right in the
first place. Good lawyers will formally engage the accountant, often in a three-way agreement
among the lawyer, the accountant and the taxpayer. A nuance of this consideration is how the Kovel
experts billing is handled. Some attorneys have the Kovel expert to bill the law firm, with the law
firm then passing the cost to the client. Others have the Kovel expert bill the client for direct
1522
See generally John A. Townsend, The Accountants Role and Risks in Koveling,
2 Tax Practice & Procedure No. 4 p. 20 (Aug-Sept. 2000); for an example of doing it wrong in a
case where the parties could have well afforded to do it right, see Cavallaro v. United States, 284
F.3d 236 (1st Cir. 2002); see also United States v. Adlman, 468 F.2d 1495 (2d Cir. 1995) which is
discussed below in this section.
1523
E.g., United States v. Judson, 322 F.2d 460 (9th Cir. 1963).
- 643 -
payment by the client, but only after the lawyer reviews and approves the bill first. Either way
should work.
Second, a valid Kovel expert can involve any type of expert needed for legal representation
not just the accountant as expert on tax matters used in the Kovel case. For example, media
experts used by the attorneys in providing representation can qualify for the privilege.1524 And, so
long as the third party is assisting the attorney in the legal representation, there is no requirement
that the third party have a formal engagement agreement or even be independently paid by the client
or the lawyer.1525 The key is that the client asserting th privilege with respect to such services show
the logical nexus to the delivery of legal services.
Third, as in Kovel, the attorney need not be present when the Kovel expert and the client are
meeting in furtherance of the expert providing the assistance to the client.1526
Fourth, potential problems are encountered in the Kovel engagement of an accountant that
has been a long-term accountant for the taxpayer or provides ongoing non-legal services for the
taxpayer. The threshold problem is that it might be difficult to distinguish between what the
accountant knows outside the Kovel arrangement and what he or she knows only within the scope
of the Kovel engagement. Moreover, using the historical accountant requires that extra steps be
taken to assure that the information related Kovel engagement is clearly separate from the
information learned in the accountants other engagements. A relatively recent case involved a large
corporation that engaged a large accounting firm to render advice on a sensitive reorganization issue.
The officer in the corporation who engaged the accountants was a lawyer who, of course, rendered
legal services to the corporation. By having clear understandings and clear responsibilities, the
lawyer could have Kovelized the accountants. He did not do that, however, and the engagement
was treated as just a continuation of the historical services which were services rendered by
accountants to the corporation. As I said, the planning was very sensitive and when the IRS audited,
it wanted to look at the planning memoranda. Bottom-line, the Second Circuit, holding the taxpayer
to its burden to establish entitlement to the privilege, held that the taxpayer had not satisfied that the
accountants had been engaged in the rendering of legal services. Like I say, with a little attention
to detail, for that type of planning transaction, the accountant could have easily been Kovelized. The
attention to detail would have been to prepare a Kovel agreement clearly delineating that the
services would be rendered to the corporate attorney for legal advice to the corporation, to require
the accountants to treat the engagement separately (e.g., separate billing and maintenance of separate
privileged files within the accounting firm), and have the corporate attorney as the conduit through
which all advice flowed.
1524
In re Grand Jury Subpoenas Dated March 24, 2003, 265 F. Supp. 2d 321 (SDNY
2003).
1525
Jenkins v. Jenkins-Benning, 487 F.3d 482, 491-2 (7th Cir. 2007) (non tax case but
providing a good summary of the cases; does not mention Kovel, but does not have to since things
equal to the same thing are equal to each other).
1526
In re: Grand Jury Subpoenas Dated March 24, 2003, 265 F. Supp. 2d 321, 331
(SDNY 2003).
- 644 -
Fifth, one of the most nettlesome issues in dealing with the attorney-client privilege in a tax
practice, exemplified by Judge Posners visceral reaction in Frederick, is to distinguish between
providing legal services that qualify for the privilege and providing other types of services which
do not qualify for the privilege. In this regard, it is always the clients obligation to establish the
privilege. This means that where an attorney or an expert serves in more than the capacity of just
serving as lawyer or as an expert rendering advice to assist in the legal representation, respectively,
the client may not be establish the privilege. This issue often arises in a situation of the filing of an
amended return. If an expert is engaged by the attorney to prepare the amended return that, after
review, may be filed by the client, does the filing of the amended return waive the privilege for all
communications to the accountant or alternatively, at least as to information that flowed from the
client to the accountant /return preparer that is put on the return, was there ever an expectation of
confidentiality, a basic requirement for the privilege? This is just to say that, just as the lawyer who
appears in a dual role a la Frederick and Bornstein must be careful what he does, so to must the
lawyer pay close attention to the Kovel experts services. The lawyer may not want everything the
accountant learns to be an open book to the IRS if it inquires. This particularly should be considered
where the lawyer engages an accountant under a Kovel arrangement to prepare amended or
delinquent returns in order, for example, to qualify for the voluntary disclosure policy. The filing
of the returns will mean that the Kovel experts kimono is opened a bit, at least as to the items on
the return, under the traditional attorney-client analysis. The question is whether the IRS can then
force the full Monty. (OK, I recognize I am mixing my allusions, but you get the point.) A court
willing to slice and dice the relationship a la Bornstein may save the day for the client, but an
unwilling court (or apparently unwilling court) such as Frederick may not. Careful practitioners
with clients with large budgets may solve the problem by engaging two separate accountants one
to serve as a pure Kovel accountant to gather the information and analyze it and then, in consultation
with the attorney, to deliver to the second accountant, not a Kovel accountant, only the information
for inclusion on the return. The second accountant then prepares the return with knowledge only
of that information. So the theory goes, if the IRS presses, it will learn from that second accountant
only what he knows which is already presented on the return. Whether or not this will work remains
to be seen, but in appropriate cases (high risk) it should be considered.
F.
Work Product Privilege.
Another privilege potentially applicable in tax cases is the work product privilege. The
precise scope of the work product privilege varies among the circuits. In the Adlman case above
(which is referred to here as Adlman I), the Court remanded for a determination of the applicability
of the work product privilege after finding the attorney-client privilege inapplicable. The case we
discuss in this section of these materials is the follow-on appeals case, United States v. Adlman1527
(which I refer to as Adlman II). In reviewing these materials, please focus particularly upon the
differences among the circuits and, because these materials are prepared for the University of
Houston Law School, please focus upon the Fifth Circuit decision in United States v. El Paso Co.,1528
discussed in Adlman II.
1527
1528
134 F.3d 1194 (2d Cir. 1998).

682 F.2d 530 (5th Cir. 1982), cert. denied, 466 U.S. 944 (1984).
- 645 -
In Adlman II, the court addressed the issue of whether, although the attorney-client privilege
did not apply, the work product privilege did apply because the IRS would likely audit and contest
the tax treatment and tax litigation would ensue. The Court posited the issue as follows:
Specifically, we must address whether a study prepared for an attorney assessing the
likely result of an expected litigation is ineligible for protection under the Rule if the
primary or ultimate purpose of making the study was to assess the desirability of a
business transaction, which, if undertaken, would give rise to the litigation. We hold
that a document created because of anticipated litigation, which tends to reveal
mental impressions, conclusions, opinions or theories concerning the litigation, does
not lose work-product protection merely because it is intended to assist in the making
of a business decision influenced by the likely outcome of the anticipated litigation.
Where a document was created because of anticipated litigation, and would not have
been prepared in substantially similar form but for the prospect of that litigation, it
falls within Rule 26(b)(3).
The Court noted that the first problem was to determine whether the memoranda was
prepared in anticipation of litigation as required for the work product privilege. The court said:
The formulation applied by some courts in determining whether documents are
protected by work-product privilege is whether they are prepared primarily or
exclusively to assist in litigation -- a formulation that would potentially exclude
documents containing analysis of expected litigation, if their primary, ultimate, or
exclusive purpose is to assist in making the business decision. Others ask whether
the documents were prepared because of existing or expected litigation -- a
formulation that would include such documents, despite the fact that their purpose
is not to assist in litigation. Because we believe that protection of documents of
this type is more consistent with both the literal terms and the purposes of the Rule,
we adopt the latter formulation.
1. Primarily to assist in litigation.
The primarily to assist in litigation formulation is exemplified by a line of
cases from the United States Court of Appeals for the Fifth Circuit. In United States
v. Davis, 636 F.2d 1028 (5th Cir.), cert. denied, 454 U.S. 862 * * * (1981), the Fifth
Circuit denied protection to documents made in the course of preparation of a tax
return. This result was well justified as there was no showing whatsoever of
anticipation of litigation. In what might be characterized as a dictum, or in any event
a statement going far beyond the issues raised in the case, the court asserted that the
Rule applies only if the primary motivating purpose behind the creation of the
document was to aid in possible future litigation. 636 F.2d at 1040.
Then, in United States v. El Paso Co., 682 F.2d 530 (5th Cir. 1982), cert.
denied, 466 U.S. 944 * * * (1984), a large public corporation sought to shield
- 646 -
documents that analyzed prospective liabilities that might result from litigation with
the IRS over its tax returns. The documents were prepared not to assist in litigation
but to establish and justify appropriate reserves in El Pasos financial statements.
Treating the Davis dictum as law, the Fifth Circuit held that because the primary
motivating force [behind the preparation of the documents was] not to ready El Paso
for litigation but rather to bring its financial books into conformity with generally
accepted auditing principles, 682 F.2d at 543, and because the documents liability
analysis was only a means to a business end, id., the documents were not prepared
in anticipation of litigation within the meaning of the Rule and enjoyed no
work-product protection. * * * *.
We believe that a requirement that documents be produced primarily or
exclusively to assist in litigation in order to be protected is at odds with the text and
the policies of the Rule. Nowhere does Rule 26(b)(3) state that a document must
have been prepared to aid in the conduct of litigation in order to constitute work
product, much less primarily or exclusively to aid in litigation. Preparing a document
in anticipation of litigation is sufficient.
The text of Rule 26(b)(3) does not limit its protection to materials prepared
to assist at trial. To the contrary, the text of the Rule clearly sweeps more broadly.
It expressly states that work-product privilege applies not only to documents
prepared . . . for trial but also to those prepared in anticipation of litigation. If the
drafters of the Rule intended to limit its protection to documents made to assist in
preparation for litigation, this would have been adequately conveyed by the phrase
prepared . . . for trial. The fact that documents prepared in anticipation of
litigation were also included confirms that the drafters considered this to be a
different, and broader category. Nothing in the Rule states or suggests that
documents prepared in anticipation of litigation with the purpose of assisting in the
making of a business decision do not fall within its scope.
In addition, the Rule takes pains to grant special protection to the type of
materials at issue in this case -- documents setting forth legal analysis. While the
Rule generally withholds protection for documents prepared in anticipation of
litigation if the adverse party shows substantial need for their disclosure and
inability to obtain their equivalent by other means, even where the party seeking
disclosure has made such a showing the Rule directs that the court shall protect
against disclosure of the mental impressions, conclusions, opinions, or legal theories
of . . . [a party or its representative] concerning the litigation. Fed. R. Civ. P.
26(b)(3) (emphasis added). As the Advisory Committee notes indicate, Rule 26(b)(3)
is intended to ratify the principles that each sides informal evaluation of its case
should be protected, that each side should be encouraged to prepare independently,
and that one side should not automatically have the benefit of the detailed
preparatory work of the other side. Where the Rule has explicitly established a
special level of protection against disclosure for documents revealing an attorneys
- 647 -
(or other representatives) opinions and legal theories concerning litigation, it would
oddly undermine its purposes if such documents were excluded from protection
merely because they were prepared to assist in the making of a business decision
expected to result in the litigation.
****
In addition to the plain language of the Rule, the policies underlying the
work-product doctrine suggest strongly that work-product protection should not be
denied to a document that analyzes expected litigation merely because it is prepared
to assist in a business decision. Framing the inquiry as whether the primary or
exclusive purpose of the document was to assist in litigation threatens to deny
protection to documents that implicate key concerns underlying the work-product
doctrine.
The problem is aptly illustrated by several hypothetical fact situations likely
to recur:
(i) A company contemplating a transaction recognizes that the transaction
will result in litigation; whether to undertake the transaction and, if so, how to
proceed with the transaction, may well be influenced by the companys evaluation
of the likelihood of success in litigation. Thus, a memorandum may be prepared in
expectation of litigation with the primary purpose of helping the company decide
whether to undertake the contemplated transaction. An example would be a publisher
contemplating publication of a book where the publisher has received a threat of suit
from a competitor purporting to hold exclusive publication rights. The publisher
commissions its attorneys to prepare an evaluation of the likelihood of success in the
litigation, which includes the attorneys evaluation of various legal strategies that
might be pursued. If the publisher decides to go ahead with publication and is sued,
under the primarily to assist in litigation formulation the study will likely be
disclosed to the opposing lawyers because its principal purpose was not to assist in
litigation but to inform the business decision whether to publish. We can see no
reason under the words or policies of the Rule why such a document should not be
protected. See United States v. Adlman, 68 F.3d at 1501.
(ii) A company is engaged in, or contemplates, some kind of partnership,
merger, joint undertaking, or business association with another company; the other
company reasonably requests that the company furnish a candid assessment by the
companys attorneys of its likelihood of success in existing litigations. For instance,
the companys bank may request such a report from the companys attorneys
concerning its likelihood of success in an important litigation to inform its lending
policy toward the company. Or a securities underwriter contemplating a public
offering of the companys securities may wish to see such a study to decide whether
to go ahead with the offering without waiting for the termination of the litigation.
- 648 -
Such a study would be created to inform the judgment of the business associate
concerning its business decisions. No part of its purpose would be to aid in the
conduct of the litigation. Nonetheless it would reveal the attorneys most intimate
strategies and assessments concerning the litigation. We can see no reason why,
under the Rule, the litigation adversary should have access to it. But under the Fifth
Circuits to assist test, it would likely be discoverable by the litigation adversary.
(iii) A business entity prepares financial statements to assist its executives,
stockholders, prospective investors, business partners, and others in evaluating future
courses of action. Financial statements include reserves for projected litigation. The
companys independent auditor requests a memorandum prepared by the companys
attorneys estimating the likelihood of success in litigation and an accompanying
analysis of the companys legal strategies and options to assist it in estimating what
should be reserved for litigation losses.
In each scenario, the company involved would require legal analysis that falls
squarely within Hickmans area of primary concern -- analysis that candidly
discusses the attorneys litigation strategies, appraisal of likelihood of success, and
perhaps the feasibility of reasonable settlement. The interpretation of Rule 26(b)(3)
advocated by the IRS imposes an untenable choice upon a company in these
circumstances. If the company declines to make such analysis or scrimps on candor
and completeness to avoid prejudicing its litigation prospects, it subjects Itself and
its co-venturers to ill-informed decisionmaking. On the other hand, a study reflecting
the companys litigation strategy and its assessment of its strengths and weaknesses
cannot be turned over to litigation adversaries without serious prejudice to the
companys prospects in the litigation. Cf. Hickman, 329 U.S. at 516, 67 S. Ct. at 396
(Jackson, J., concurring) (Discovery was hardly intended to enable a learned
profession to perform Its functions either without wits or on wits borrowed from the
adversary.).
We perceive nothing in the policies underlying the work-product doctrine or
the text of the Rule itself that would justify subjecting a litigant to this array of
undesirable choices. The protection of the Rule should be accorded to such studies
in these circumstances. See United States v. Adlman, 68 F.3d at 1501 (There is no
rule that bars application of work-product protection to documents created prior to
the event giving rise to litigation.). We see no basis for adopting a test under which
an attorneys assessment of the likely outcome of litigation is freely available to his
litigation adversary merely because the document was created for a business purpose
rather than for litigation assistance. The fact that a documents purpose is
business-related appears irrelevant to the question whether it should be protected
under Rule 26(b)(3).
****
- 649 -
2. Prepared because of litigation.

The formulation of the work-product rule used by the Wright & Miller
treatise, and cited by the Third, Fourth, Seventh, Eighth and D.C. Circuits, is that
documents should be deemed prepared in anticipation of litigation, and thus within
the scope of the Rule, if in light of the nature of the document and the factual
situation in the particular case, the document can fairly be said to have been prepared
or obtained because of the prospect of litigation. * * * *
The Wright & Miller because of formulation accords with the plain
language of Rule 26(b)(3) and the purposes underlying the work-product doctrine.
Where a document is created because of the prospect of litigation, analyzing the
likely outcome of that litigation, it does not lose protection under this formulation
merely because it is created in order to assist with a business decision.
Conversely, it should be emphasized that the because of formulation that
we adopt here withholds protection from documents that are prepared in the ordinary
course of business or that would have been created in essentially similar form
irrespective of the litigation. It is well established that work-product privilege does
not apply to such documents. See Fed. R. Civ. P. 26(b)(3), Advisory Committees
note (Materials assembled in the ordinary course of business . . . are not under the
qualified immunity provided by this subdivision.); see, e.g., National Union Wire,
967 F.2d at 984. Even if such documents might also help in preparation for litigation,
they do not qualify for protection because it could not fairly be said that they were
created because of actual or impending litigation. See Wright & Miller 2024, at
346 (even though litigation is already in prospect, there is no work-product
immunity for documents prepared in the regular course of business rather than for
purposes of the litigation).
Furthermore, although a finding under this test that a document is prepared
because of the prospect of litigation warrants application of Rule 26(b)(3), this does
not necessarily mean that the document will be protected against discovery. Rather,
it means that a document is eligible for work-product privilege. The district court can
then assess whether the party seeking discovery has made an adequate showing of
substantial need for the document and an inability to obtain its contents elsewhere
without undue hardship. The district court can order production of the portions of the
document for which a litigant has made an adequate showing. The court can focus
its attention on whether the document or any portion Is the type of material that
should be disclosed, while retaining the authority to protect against disclosure of the
mental impressions, strategies, and analyses of the party or its representative
concerning the litigation.
In short, we find that the Wright & Miller because of test appropriately
focuses on both what should be eligible for the Rules protection and what should
- 650 -
not. We believe this is the proper test to determine whether a document was prepared
in anticipation of litigation and is thus eligible for protection depending on the
further findings required by the Rule.1529
The Court then remanded for the district court to clarify its application of the work product
privilege.
Would the Court have been so willing to acknowledge that the work product privilege could
possibly apply if Arthur Andersen had reported to a CFO/Tax Director who was an accountant rather
than a lawyer? Certainly, in this area of federal tax practice, many accountants are quite as capable
by education and experience in spotting the potential for tax controversy leading to litigation and
preparing for it as are lawyers. If Mr. Adlmans profession as a lawyer was not critical, then the
privilege is really the work-product privilege and not the attorney-work product privilege.
Note in this regard that the Court emphasizes that the work was performed under the auspices
of an attorney. Is this yet another good reason to hire an attorney, even for in-house positions,
rather than an accountant?
An interesting and relevant example of the work product privilege was recently addressed
in In re Grand Jury Subpoena Dated Oct. 22, 2001 (John Doe A. v. United States), 282 F.3d 156
(2nd Cir. 2001). The background is as follows: In criminal investigations, the Government
investigator who will be an IRS special agent in an IRS criminal investigation or an Assistant United
States Attorney in a grand jury investigation will often interview witnesses, including potential
targets of the investigation, without the questions and answers being recorded. Usually, there will
be at least one other Government person present who can testify as to the statements made by the
witness in the event the Government were to assert that the witness gave false statements
prosecutable under 18 U.S.C. 1001. Often, there will be another witness as to what the witness
said the witnesss own attorney. Can the Government force the witnesss own attorney to testify
as to what the witness, his client, said? In In re Grand Jury Subpoena Dated Oct. 22, 2001, two IRS
Special Agents conducting an investigation interviewed the general counsel of the company being
investigated. At some point, the investigation expanded to include the issue of whether the general
counsel had lied in the interview. However, one of the Special Agents had died, so the
Governments case was based solely on the one live Special Agent. A grand jury investigating the
company then issued a subpoena for the testimony of the lawyer that had appeared with the general
counsel at the interview. The prosecutor represented to the subpoenaed attorney that her testimony
was required only as to a factual report of what the client said in the interview. The court of appeals
held an attorney may properly assert the work product privilege to avoid telling a grand jury what
her client said to government agents during an interview in the lawyer's presence if the testimony
may be used to indict the client for previous criminal conduct. The Court reserved the issue of
whether the work product privilege might apply if the governments sole purpose was to prove what
was said at trial solely in order to investigate a violation of 18 U.S.C. 1001.
1529
For a similar analysis, see United States v. Foxworthy, 457 F.3d 590 (6th Cir. 2006).
- 651 -
Finally, the work product privilege may be waived, but the waiver of work product is not as
broad as the attorney-client waiver. The attorney-client privilege is waived by intentional disclosure
to anyone who is not an attorney (or deemed attorney via such doctrines as the Kovel concept or the
joint defense group) or the client. The work product privilege as often formulated requires a
disclosure to someone having adverse interests.1530 A recent hot topic question is whether a
corporations disclosure to its attesting auditors of its tax accrual workpapers supporting its tax
reserve for financial statement purposes is a waiver of the work product privilege as to the
underlying workpapers that financial auditors in a post-SOX world insist upon reviewing in order
to attest the propriety of the financial statement reserve for tax liabilities. In the Textron case, the
First Circuit recently held (i) that tax accrual workpapers do qualify for the work product privilege
under the more lenient in anticipation of litigation standard, and (ii) that disclosure to the auditor
is not per se a waiver of the privilege because the auditor is not an adversary, but that further trial
level fact findings are necessary to determine whether that disclosure might be a conduit through
the auditor to third parties who are adversarial.1531 In a subsequent case,1532, the Court of Appeals
for the District of Columbia took a more taxpayer-friendly approach to the work product privilege
in the context of tax accrual workpapers and allowed the privilege to apply to the auditors tax
accrual workpapers. There will be developments resolving the holdings and nuances of these
opinions in the reasonably near future.
G.
Spousal Privileges.
1.
General Justification for Spousal Privilege.
The general societal value supported by the spousal privileges is the integrity of the marriage
unit. The justification for the particular subset of marital privileges are usually more fine-tuned than
that, focusing on the nature of the testimony, its potential adverse effect on the marriage unit or
marriage in general, and harm to society that justifies the privilege. For present purposes, readers
should just recall that it is the marriage unit and the societal value of fostering the marital unit that
justifies these privileges.
2.
Spousal Communications Privilege.
The spousal confidential communications privileges permits either spouse to assert a

privilege to prevent a spouse from testifying or being compelled to testify about confidential
communications between the spouses during the marriage. Not all communications, even if intended
to be confidential are covered; there is an exception for communications in furtherance of joint
1530
United States v. MIT, 129 F.3d 681, 687 (1st Cir. 1997); and Merrill Lynch & Co.
v. Alleghany Energy Supply Inc. Co., 229 F.R.D. 441 (S.D.N.Y. 2004).
1531
United States v. Textron, 577 F.3d 21 (1st Cir. 2009)(en banc), cert. denied 176 L. Ed.
2d 1219 (5/24/10).
1532
United States v. Deloitte, 610 F.3d 129 (D.C. 2010).
- 652 -
participation in a crime.1533 Either spouse may assert this privilege as to both that spouses
communications to the other spouse and the other spouses communications to that spouse. The
privilege is waivable only by the spouse making the communication, and like the attorney-client
privilege, the presence of some person other than the married parties who is capable of
understanding the communications will waive the privilege.1534 The privilege survives the
marriage.1535
3.
Spousal Immunity (aka Adverse Testimony Privilege).
The spousal immunity privilege (sometimes called the adverse testimony privilege) protects
a witness spouse from giving compelled testimony against the other spouse in a criminal proceeding.
This is a privilege that must be asserted by the witness spouse; the defendant spouse is not permitted
to assert it as a bar to the witness spouses testimony if the witness spouse is willing to testify.1536
The notion is that, if the witness spouse is willing to testify against the defendant or target spouse,
the marriage is already in disarray and no societal benefit is furthered by permitting the defendant
or target spouse to prevent the testimony of the witness spouse. The defendant spouse may, of
course, assert the marital communications privilege to prevent the witness spouse from testifying
about confidential communications during the marriage.
One important context in which the assertion of spousal immunity privilege created landmark
law is in Crawford v. United States, 541 U.S. 36 (2003). In that case, the wife had given a taped
statement to the police shortly after an assault on a third party. In the interview in which she made
the statement, both the husband the wife had been given standard Miranda warnings but neither
asserted privileges of any sort, much less that spousal immunity privilege. At the husbands criminal
trial, the husband invoked the spousal immunity privilege to prevent the wife from being compelled
to testify. (Note that, under Washington state law, the husband could prevent the testimony, contrary
to the rule in federal courts noted above that only the witness spouse may invoke this privilege.)
The state then successfully moved, over the husbands objection, to enter the statement in evidence.
The Washington Supreme Court sustained the use of the statement based on a hearsay analysis that
then was materially coterminous with the right of confrontation -- i.e., the statement had indicia,
referred to as guarantees of trustworthiness, of reliability so as to clear a hearsay / Confrontation
Clause hurdle. The issue upon which the Supreme Court digressed was whether the use of the
statement violated the husbands Sixth Amendment right to be confronted with the witnesses
against him. Specifically, the Court reimagined and rewrote the Confrontation Clause analysis.
The right to confrontation where successfully asserted to prevent an out of court statement from
1533
United States v. Ramirez, 145 F.3d 345, 355 (5th Cir. 1998); United States v. Chagra,
754 F.2d 1181, 1182 (5th Cir. 1985).
1534
Trammel v. United States, 445 U.S. 40 (1980). Thus, for example, the presence of
a child of the marriage might waive the privilege if the child were of an age to be able to understand
it. In Trammel, the communication was in writing which had been transcribed by a stenographer.
Held, not a confidential marital communication.
1535
United States v. Entrekin, 624 F.2d 597, 598 (5th Cir. 1980).
1536
Trammel v. United States, supra.
- 653 -
coming in operates like a privilege i.e., it results in denying the factfinder the right to otherwise
available evidence in the truth finding process. The Confrontation Clause is nevertheless not
normally perceived as a privilege, so I wont further digress here on the Confrontation Clause as a
privilege. (Bottom line, the Court held that the use of the statement violated the Confrontation
Clause.)
4.
Examples.
To use a stark nontax example, assume the unlikely case that (i) a wife observes her husband
shoot and kill a person with a gun and (i) later, after all the immediate events of the shooting are in
the past, the husband tells her that he intended to kill the person when he shot him. If the wife were
called to testify against her husband in a criminal proceeding, the wife could assert the spousal
immunity privilege to avoid her compelled testimony but the husband could not assert the spousal
immunity privilege if she were otherwise willing to testify. However, even if she were otherwise
willing to testify, the husband could prevent her testimony about the subsequent communications
between them.
To use a closer to home but analogous tax example, assume that (i) after signing a joint
return, the wife gave the return to her husband, and the wife observed the husband writing his
signature on the return, depositing the signed return in an envelope and dropping the envelope with
the return in a mail box; and (ii) the husband later admitted to the wife that he had fraudulently
omitted some income from the return. In a later criminal trial, the IRS wants to have the wife testify
to these matters. The wife could assert the spousal immunity privilege to avoid her compelled
testimony, but could testify if she chose to. The husband could prevent her from testifying as to the
confidential communications about the his fraudulent intent in omitting income from the return.
I have used the combination of these privileges in a criminal investigation where I
represented the husband who was the sole target of the investigation and also represented the wife
who the IRS CI agent summonsed to appear solely as a witness in the investigation of her husband.
As my opening salvo monologue to the CI agents, I pronounced that (i) the husband and the wife
each asserted the spousal communications privilege as to their respective communications to each
other and (ii) the wife asserted the spousal immunity privilege to being forced to testify in a
proceeding against her husbands criminal interests. I even instructed the witness not to answer any
questions. Indeed, I did not even let her testify as to her name or other such nonincriminating
information because the spousal immunity privilege is a blanket privilege. I testified to the fact
that the person in the room with me and the CI Agents was the wife who had been summonsed to
appear, but I did not let her verbally testify to that effect. The CI agents present were not pleased,
but could do nothing about it.
To put this anecdotal experience in perspective, in my experience, it is rare indeed that a
spouse will be called in a criminal investigation of the other spouse where the parties are still
married. In a tax setting, it may not at all be clear that the purported witness is or could not be at
criminal jeopardy and thus have the additional privilege of the Fifth Amendment that would likely
- 654 -
be asserted. But, even where it may be clear that a spouse might not have a Fifth Amendment
privilege, the IRS in investigation usually does not call an existing spouse.
H.
Joint Defense Agreements (JDAs).

1.
Theory of JDAs Extension of Attorney-Client Privilege.
Knowledge is power. In a defense setting, obtaining information efficiently and effectively

is power. In multi-target investigations and multi-defendant prosecutions, each target or defendant
may have information that would be important to the defense of the other targets or defendants.
Hence, the targets and defendants often feel a mutual need to share information for their mutual
benefit. Sharing the information, however, means the potential for damage if the information is
misused. No target or defendant wants to share information with other targets or defendants who
might then turn it over to the Government. And, no target or defendant wants the sharing of
information to be treated as a waiver of the attorney-client privilege or work product privilege. If
these risks can be eliminated or at least mitigated sufficiently, the sharing of information among
targets or defendants can be quite beneficial to them. The JDA permits such sharing of information
with at least acceptable tolerances for risk.1537
JDAs are based on the joint defense or common interest doctrine.1538 The joint defense
doctrine permits parties investigated for or charged with a crime (hence a common interest) to share
information pursuant to a joint defense agreement without waiving any of the parties attorney-client
and work product privileges.1539 The doctrine is usually justified as an extension of the attorneyclient privilege that makes, for some purposes (some is meant to be vague here), each attorney in
1537
See Deborah Stavile Bartel, Reconceptualizing the Joint Defense Doctrine, 65

Fordham L. Rev. 871, 880-885 (1996) (discussing the benefits of the JDA).
1538
The joint defense doctrine is a subset of a broader common interest rule permitting
the sharing of information where parties have common interests. United States v. Schwimmer, 892
F.2d 237, 243 (2d Cir. 1989). I focus here only on the joint defense doctrine.
1539
United States v. Schwimmer, 892 F.2d 237 (2d Cir. 1989); Hunydee v. United States,
355 F.2d 183 (9th Cir. 1965).
- 655 -
the joint defense group (JDG) the attorney for each of the members of the JDG.1540 I explore in
this section some of the problems that this justification for the doctrine creates.
The purpose of the doctrine is to insure that members of the JDG cans share otherwise
privileged attorney-client communications or attorney work product without waiving either
privilege. The joint defense doctrine is thus more precisely is characterized as a derivative privilege
to protect from waiver otherwise privileged information shared in the joint defense context. This
truism sets the limits of its application information that is not otherwise privileged does not
become privileged simply because shared among parties who have entered a JDA. Of course, there
is also a truism that much of what will be shared will be otherwise privileged at least under the work
product privilege.
Most critically and immediately, of course, the members of the JDG do not want the
Government to be able get to the information and use it against any member of the JDG in the
criminal investigation and prosecution. Beyond that, generally, if the JDA is to serve its intended
purpose, there needs to be some assurance that the information will not be used in any context
adverse to the members providing the information.
I will use a simple example to explore some of the issues presented by JDAs. A and B are
targets of a grand jury investigation. A has engaged attorney X, and B has engaged you. You and
X are considering a JDA in which X will share with you otherwise privileged information he
receives from A, and you likewise will share with X otherwise privileged information you receive
1540
United States v. Henke, 222 F.3d 633, 637 (9th Cir.2000); Wilson P. Abraham
Construction Corp. v. Armco Steel Corp., 559 F.2d 250, 253 (5th Cir. 1977) (holding that an
attorney in a JDA is in effect, counsel for all and breaches his fiduciary duty if he uses
information learned from one of the co-defendants pursuant to the JDA against that co-defendant);
United States v. Melvin, 650 F.2d 641, 645-646 (5th Cir. 1981) (noting the respectable body of law
from other courts to the effect that the attorney-client privilege applies to confidential
communications among attorneys and their clients for purposes of a common defense and string
citing cases); United States v. BDO Seidman, 492 F.3d 806, 815-816 (7th Cir. 2007) (noting the
doctrine extends the attorney-client privilege to otherwise non-confidential communications in
limited circumstances.). Because, however, the JDA does not fit perfectly the paradigm of the
attorney-client privilege (e.g,, can it be logically said that, by joining a JDA, an attorney for one
participant becomes the attorney for all, thus raising conflicts questions and duty questions?), there
have been various attempts at reformulating the justification for the doctrine in a way that does not
implicate the attorney-client privilege. See ABA Formal Opinion 95-395 (July 24, 1995); Brown
v. Doe, 2 F.3d 1236 (2d Cir. 1993) (describing the joint defense doctrine as creating a fiduciary
relationship among the members of the JDG and their lawyers); Deborah Stavile Bartel,
Reconceptualizing the Joint Defense Doctrine, 65 Fordham L. Rev. 871 (1996); and Amy Foote,
Joint Defense Agreements in Criminal Prosecutions: Tactical and Ethical Implications, 12 Geo. J.
Legal Ethics 377, 378 (1999). Nevertheless, mainstream discussion by the courts and the
commentators continue to emphasize the attorney-client privilege justification for the doctrine, even
when they gerrymander the concept to avoid some of the problems from application of attorneyclient privilege concepts.
- 656 -
from B. A and B, and their respective attorneys, will commit under the JDA to maintain the
confidentiality of the information so shared. Is this really an attorney-client relationship between
you and A?1541 If that is the case, can A object to your representing B if both are subsequently
indicted or, worse, can the prosecutor urge that X and you are conflicted out in the criminal case
because of that JDA?1542 Even if there is not strictly speaking a traditional full-bore attorney-client
relationship between you and A, do you still have responsibilities to A with respect to using the
information received from A or As attorney - specifically, can you use the information to benefit
your client (B) even if it is adverse to A?1543 On a more mundane level, do you have to do a conflicts
check with respect to A and will you thereafter be conflicted in future representation based upon the
relationship between you and A under the JDA? Can you continue to represent B if As and Bs
interests diverge? Should your client decide to plea bargain, can you bring to the negotiating table
the information you learned from A (either directly or through As lawyer, X)? Do you have
malpractice exposure to A?1544
I cannot provide here anything approaching a definitive discussion of these issues, but do
address the more immediate ones that are raised by a JDA. I do note at the outset, however, that,
whatever the full ramifications of the JDA are, at a minimum, an attorney considering having his
client enter a JDA should perform a conflict check for each client in the JDG and insist that each of
the attorneys in the JDG do so likewise.1545 Furthermore, if possible, the issues raised above should
be discussed and dealt with in the JDA in a way that all parties understand how the risks in the JDA
are assigned among the parties.
1541
Cases are not wholly consistent on this point. See Mahaffey, supra.
See Brown v. Doe, 2 F.3d 1236, 1245 (2d Cir. 1993) (answering the question no).
1543
See ABA Comm. on Ethics and Prof'l Responsibility, Formal Op. 95-395 (1995),
titled Obligations of a Lawyer who Formerly Represented a Client in Connection with a Joint
Defense Consortium. This opinion reasons that, while the attorney has no ethical duties typical of
the attorney-client relationship to the other parties to the JDA, the attorney does have fiduciary
responsibilities limiting his use of information obtained pursuant to the JDA.
1544
For a good discussion of malpractice in the common interest area, see George S.
Mahaffey, Jr., All for One and One for All? Legal Malpractice Arising from Joint Defense
Consortiums and Agreements: The Final Frontier of Professional Liability, 35 Ariz. St. L.J. 21
(2003).
1545
Cf. Essex Chemical Corp. v. Hartford Accident and Indemnity Co., 975 F. Supp. 650
(D.C.N.J 1997), reversed by District Court Judge in Essex Chemical Corp. v. Hartford Accident and
Indemnity Co., 993 F. Supp. 241 (D.C.N.J 1998). In the original magistrates order which was
subsequently reversed, the magistrate found an automatic disqualification from such an extended
conflict. The district courts reversal simply declined to force an automatic disqualification in order
to make a more fine-tuned inquiry into what potential disqualifying information may have been
shared. Indeed, because of this possibility of extended representation, should not the lawyer
contemplating such agreement also think about whether this extended representation may create
conflicts in future representation?
1542
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2.
Types of JDAs.
There is no standard JDA. The terms and scope of the JDA vary with the needs and risktolerances of the members of the JDG. One author has noted:
The cooperative arrangement can take a variety of shapes. Sometimes the
lawyers exchange legal or factual memoranda without sharing client confidences.
Sometimes the lawyers meet and disclose, either orally or via memoranda, their
respective clients' confidential statements. Other times, the lawyers and
co-defendants find it best to meet together to discuss joint defense strategy. It also
happens that in pursuit of a joint defense, the lawyer for one co-defendant, or one of
the lawyer's agents - such as a criminal investigator or an accountant - may meet
separately or communicate directly with a co-defendant who is not his client in the
absence of that co-defendant's lawyer.1546
My experience reflects other potential uses of the JDA. In a document intensive investigation or
prosecution, the parties may agree to keep a jointly accessible collection or database of documents
and research which may be divided up among the lawyers in order to minimize costs and maximize
efficiency. The precise shape and terms of the JDA will be negotiated among counsel for the
members of the JDG.
Because there is no standard JDA, an informal oral JDA raises a real risk that the parties will
be unable to prove the existence of a JDA with sufficient terms clearly agreed upon that a court
would find the JDA existed.1547 That does not mean that a JDA must be written in all cases. Oral
JDAs the terms of which can be proved will perform the intended function (depending upon the
terms). Moreover, sometimes the ebb and flow of communication between counsel simply does not
1546
Deborah Stavile Bartel, Reconceptualizing the Joint Defense Doctrine, 65 Fordham

L. Rev. 871, 875-6 (1996).
1547
See United States v. Weissman, 1996 U.S. Dist. LEXIS 19066 (S.D. N.Y. 1996) and
22 F. Supp. 2d 187 (S.D. N.Y. 1998), affd 195 F.3d 96 (2d Cir. 1999) (where the trial court was in
a state of equipoise as to whether a JDA even existed, so the party seeking to benefit from a JDA
lost because he could not prove the existence of the JDA; held also that defendant failed to prove
any prejudicial use of the information that may have come from the sharing of information); United
States v. Hsia, 81 F.Supp. 2d 7 (D. D.C. 2000) (defendant failed to prove that Government obtained
information privileged under the JDA); see also Jed S. Rakoff, The Drafting of Joint Defense
Agreements, NY Law Journal 3 (11/9/1995) (it is not uncommon for counsel representing
co-subjects of a criminal investigation simply to recite orally that they agree to be bound by a joint
defense agreement without ever attempting to specify its terms -- with potentially disastrous results
if the agreement is challenged.) As the court noted in the first Weissman opinion, however, at least
the Ninth Circuit is willing to find such an agreement implicit in sharing among parties with a
common interest, whereas most other courts requiring a showing of an explicit JDA.
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permit the time and effort required to hammer out a written JDA.1548 Such informal JDAs should be
entered only with an understanding that the benefits to be achieved by foregoing the effort to
hammer out the written JDA outweigh the benefits of getting it in writing.1549
3.
The Parties Interests Must be Common.
For the doctrine to apply, the parties must have common interests, although the interests need
not be exactly the same nor need there be any assurance that, in the future, the parties interests will
not diverge.1550 Where the parties are targets of criminal investigations and thus have penal and
perhaps even related civil exposure, their interests are almost certainly sufficiently common to
support the doctrine. Our example certainly offers sufficiently common interests to support a JDA.
Where, however, a party to a purported JDA has no civil or criminal exposure, his or her interests
may not be sufficiently common with those a civil or criminal risk to support the JDA.1551 The
problem in this latter case is that the parties may not recognize at the time that their interests are not
1548
For example, I have represented targets in criminal investigations with a relatively

high number of potential subjects and targets (in grand jury jargon). In such investigations, it is not
usual or practical to have formal written JDAs with all members of the class, and yet there will be
informal sharing of information (e.g., by conference calls among counsel). My experience is that,
at the beginning of these calls, someone will invariably state the call is proceeding pursuant to a
JDA, the terms of which are never spelled out. Despite the potential difficulty of sustaining the JDA
in this context, however, my experience is that no harm is done because, in that type of setting, no
counsel is going to disclose sensitive attorney-client communications or even sensitive work
product. Still, it is perhaps the better part of wisdom to at least state that the call is proceeding on
the basis of a JDA so that at least there will be an argument to make if the Government tries to get
to the information e.g., by offering a deal to one member of the JDG group.
1549
For a good article on drafting the JDA, Jed S. Rakoff, The Drafting of Joint Defense
Agreements, NY Law Journal 3 (11/9/1995); see also Robert G. Morvillo, Modernizing Joint
Defense Agreements, NYLJ 3 (6/1/1999).
1550
United States v. McPartlin, 595 F.2d 1321 (7th Cir. 1979), cert. denied 444 U.S. 833
(1979). The doctrine is a subset of a broader common interest doctrine that protects shared
communications in joint legal representation involving common interests even outside the context
of defense in a criminal investigation or prosecution. Restatement (Third) of Law Governing
Lawyers 76 cmt. b and reporters note (2000). I use the term JDA here because our context is a
criminal investigation or prosecution.
1551
E.g., In re Grand Jury Subpoena Duces Tecum, 112 F3d 910, 922 (8th Cir.), cert.
denied, 521 U.S. 1105 (1997) (rejecting claim of a joint defense between President Clintons wife
and the White House, where, the court found, Mrs. Clinton may have had exposure but the White
House did not); and United States v. Aramony, 88 F3d 1369, 1392 (4th Cir. 1996), cert. denied, 520
U.S. 1239 (1997) (under facts, corporate employer did not have sufficient interest to support JDA
with employee).
- 659 -
sufficiently similar to support a JDA and thus revelations to the purported JDG waives the attorneyclient privilege.1552
4.
Risk of Government Discovery and Use of JDA Information.
Suppose in our example, after both A and B are indicted, A reaches a plea agreement with
the Government that compels his cooperation -- to wit providing information relevant to the
Governments case against A. Can A disclose the information learned from B or you pursuant to the
JDA? What is Bs remedy if B discloses information received pursuant to the JDA and, worse, if
the Government uses that information against A to obtain an indictment and subsequently to obtain
a conviction? What is the value of the joint defense doctrine?
By recognizing the joint defense doctrine in the first place, the courts recognize that it might
provide some relief to B.1553 B will have to establish that there was a JDA in the first instance and
the terms of the JDA. Lets assume he can do that, because his lawyer (you) was careful to get it
in writing. The existence of the JDA means that A should not disclose the protected information to
the Government and, if he does, the Government should not use it directly or indirectly against B.
How can this be policed? If B is required to show that the Government used or misused the tainted
information, that can be daunting task indeed, because a defendant is usually unable to obtain access
to the Governments case from which a prohibited use could be shown. The practical solution would
be a Kastigar-like procedure may be required whereby the Government would have to show that it
did not use the tainted evidence.1554 If use of the tainted evidence is proved or presumed because
1552
This is one of the side benefits of a written JDA. Most form JDAs will have terms
that address some of the thorny issues and will help the parties focus on all the aspects of the JDA,
including this common interest requirement.
1553
See In re Grand Jury Subpoena, 406 F. Supp. 381, 394 (S.D.N.Y. 1975) (How well
could a joint defense proceed in the light of each co-defendants knowledge that any one of the
others might trade resultant disclosures to third parties as the price of his own exoneration or for the
satisfaction of a personal animus?).
1554
This type of hearing occurred in United States v. Weissman, 1996 U.S. Dist. LEXIS
19066 (S.D. N.Y. 1996) and 22 F. Supp. 2d 187 (S.D. N.Y. 1998), affd 195 F.3d 96 (2d Cir. 1999);
but see United States v. Hsia, 81 F.Supp. 2d 7, 19 (D. D.C. 2000) (Defendant's naked assertion that
the government has an affirmative duty to take painful steps to assure that each and every piece
of information that it receives in such a complex investigation is not the product of a joint defense
agreement, Defendant's Proposed Findings at 26, is without foundation, has no law to support it,
and is patently unrealistic.) One potential abuse of the JDA in this context would be for one of the
parties to mitigate the risk that another party will become a cooperating witness or, if he does
become a cooperating witness, neutralize or even obtain a positive benefit from his cooperation. For
example, assume in our example throughout this section that A, Xs client, is the less culpable and
lower echelon target of the Governments investigation. This is a classic case where the
Government might be willing to deal with A in order to get B, whom you represent. Would it be
appropriate for B, at your behest, to enter a comprehensive JDA with A and then do a data dump on
A in such a way that A may not be able to distinguish whether he knows and can prove that he
- 660 -
the Government is unable to show it was not used, the defendant will likely have the remedy of
suppression1555 or, in particularly egregious cases (e.g., where the defendant cooperates with the
Government without notifying the other defendants and continues to attend the joint defense
sessions) perhaps even a dismissal of the indictment.
5.
Risks Related to Trial Use of JDA Information.
Under our example, if A and B are indicted, can the prosecution assert that the JDA, by
rendering each attorney as the attorney for both A and B, seek to have them disqualified from
representing either A or B on the grounds that each attorney is hopelessly conflicted? Alternatively,
assuming that they are not conflicted out of the representation at trial, what are the limits upon the
use of the information at trial? The latter question is most sharply presented if one of the parties
assume A in the example begins cooperating with and becomes the star witness for the
Government. Can you, as the attorney for B but as the quasi-attorney for A pursuant to the JDA use
information about A learned pursuant to the JDA against B in cross-examination?
In United States v. Almeida,1556 the Eleventh Circuit addressed this issue. The Court
distinguished the JDA from the prototypical joint representation where a lawyer undertakes the
attorney-client representation of two or more persons. The Court nevertheless appeared ultimately
to accept the attorney-client metaphor for the joint defense doctrine and found implied waiver of the
privilege where a member of the JDA (A in our example above) begins cooperating with the
Government. The result is that the other members of the JDG can use the information they learned
from the member who is now cooperating with the Government even though it may not be in his best
interests.1557 The Court summarized its holding as follows:
We hold that when each party to a joint defense agreement is represented by
his own attorney, and when communications by one co-defendant are made to the
attorneys of other co-defendants, such communications do not get the benefit of the
attorney-client privilege in the event that the co-defendant decides to testify on
behalf of the government in exchange for a reduced sentence. n21 The district court's
error prevented the introduction of crucial evidence that would have significantly
undermined the credibility of three of the Government's key witnesses. There is a
reasonable possibility that the jury would not have convicted [B in our example] but
knows certain key information independently of the JDA? If the Government is aware of the
problem, it will be less willing to deal with A because it may be able to obtain little untainted
evidence of value against B. Better, still, from Bs perspective, the Government may strike a deal
with B, access all or some of the information and then be unable to show an untainted source so that
its prosecution of B might fail. Sweet. But that is not the purpose of the JDA and, if the Government
could prove that purpose, it might be able to nullify the JDA.
1555
See United States v. Melvin, 65 F.2d 641 (5th Cir. 1981).
1556
341 F.3d 1318 (11th Cir. 2003).
1557
The court relied significantly upon one of the recent leading cases, United States v.
Stepney, 246 F. Supp. 2d 1069, 1086 (N. D. Cal. 2003).
- 661 -
for the district court's erroneous exclusionary ruling. The error was not harmless, and
[Bs] conviction is therefore VACATED and the case is REMANDED for a new
trial.
n21. In the future, defense lawyers should insist that their clients enter into written
joint defense agreements that contain a clear statement of the waiver rule enunciated
in this case, thereby allowing each defendant the opportunity to fully understand his
rights prior to entering into the agreement. See, e.g., Stepney, 246 F. Supp. 2d at
1084-86 (requiring that a written joint defense agreement include a provision that the
attorney-client privilege is waived in the event that a co-defendant takes the stand
against his accomplice, and citing the model joint defense agreement prepared by the
American Law Institute and American Bar Association).1558
I.
DOJ Policies.
1.
DOJ Policy for Corporate Prosecutions.
We discussed above the development in DOJ policies for prosecuting corporations. After
much controversy over a prior policy which seemed to encourage prosecutors to seek and even
extort an entitys waiver of the attorney-client and work product privileges, DOJ retreated and the
current policy, reflected in the Filip Memorandum,1559 makes such actions the exception rather than
the norm and requires higher level approvals.
When representing an officer of a corporation in a criminal investigation where the
corporation is also potentially indictable, the corporation will usually not agree to a JDA, simply to
hold open its options in the future about whether to waive the privilege. The corporation will
nevertheless expect the cooperation of the officer just as if one had been entered and also may play
it a bit closer to the vest than it would have if a JDA had been entered. Counsel representing an
employee should push hard on this issue to try to get a JDA if he or she can.
2.
Other Privilege Policies.
DOJ has adopted policies that require special review procedures in situations potentially
implicating the privileges as well as other sensitive areas. The CTM grants exclusive authority to
the Tax Division to approve search warrant applications involving, inter alia, an accountant, lawyer,
physician, or member of the clergy.1560
1558
One author has suggested, however, that, if indeed the attorney-client privilege is the
justification for the joint defense doctrine, the mere existence of this term of a JDA may blow the
privilege to all otherwise privileged attorney-client communications shared pursuant to the JDA ab
initio since it is, after all, a waiver from the inception. Deborah Stavile Bartel, Reconceptualizing
the Joint Defense Doctrine, 65 Fordham L. Rev. 871, 911-912 n. 203 (1996)
1559
1560
CTM 3.00, Tax Division Directive No. 52 (3/17/08) (2008 ed.)
- 662 -
Although there is no federally recognized journalists privilege, DOJ does have policies
regarding the enforcement of compulsory process against journalists.1561 The IRS takes the position
that any IRS summons served upon journalists would have to meet the DOJs standards for
enforceability and that Chief Counsels approval is required.
III.
Capitalizing on the Governments Mistakes.

A.
Fourth and Fifth Amendment Rights.
What about the overzealous CI Special Agents who pay scant attention to the niceties of
constitutional guarantees? Certainly, that is irritating to the targets of the investigation and even
third parties whose rights are infringed. But what relief is available to either?
Consider the Supreme Courts opinion in United States v. Payner.1562 The IRS conducted
an extensive criminal investigation into offshore accounts. From that investigation (as more
particularly described below), the taxpayer was indicted and conviction of falsifying his 1972
income tax return in violation of 18 U. S. C. 1001. The taxpayer moved to suppress certain
evidence obtained in the investigation.
The evidence in question had been obtained through a clandestine IRS operation. The IRS
agent engaged the assistance of a private investigator (PI#1) and sometime informant to learn about
a particular Bahamas bank and its depositors. That private investigator sucked up to one of the
banks employees and introduced him to another private investigator (PI#2), a female in whom the
bank employee took some interest. PI#1 heard that the bank employee was coming to Florida and,
seeing an opportunity to access records that he thought the bank employee would have with him,
PI#1 arranged for the bank employee and PI#2 to have a rendezvous. The bank employee arrived
in Florida and went straight to PI#2's apartment. He and she (PI#2) thereafter went to dinner. While
they were gone, PI#1 entered the apartment using a key supplied by PI#2, removed the briefcase,
delivered it to the IRS Special Agent who then supervised the copying of approximately 400
documents. The briefcase was returned to the apartment before the bank employee and PI#2
returned, and bank employee at least then was none the wiser.
The prosecution of the taxpayer then ensued.
1561
28 C.F.R. 50.10. The IRS has summarized those requirements as (ILM 200631001,
reproduced at 2006 TNT 156-16):
(1) all reasonable attempts should be made to obtain information from alternative
sources; (2) the information sought must be essential, not peripheral or speculative,
to the successful completion of a case of substantial importance; (3) the information
summoned must be limited to the verification of published information, except under
exigent circumstances, and (4) the summons should be directed at material
information regarding a limited subject matter, should cover a reasonably limited
period of time, and should avoid requiring the production of a large volume of
unpublished material.
1562
447 U.S. 727 (1980).
- 663 -
The Supreme Court accepted the case to determine the application of the Fourth Amendment
and proper remedies for violations thereof. The Court reasoned:
This Court discussed the doctrine of standing to invoke the [Fourth
Amendment] exclusionary rule in some detail last Term. * * * *. We reaffirmed the
established rule that a court may not exclude evidence under the Fourth Amendment
unless it finds that an unlawful search or seizure violated the defendants own
constitutional rights. * * * *. And the defendants Fourth Amendment rights are
violated only when the challenged conduct invaded his legitimate expectation of
privacy rather than that of a third party. * * * *. The foregoing authorities establish,
as the District Court recognized, that respondent lacks standing under the Fourth
Amendment to suppress the documents illegally seized from [bank employee] * * *.
The Court of Appeals did not disturb the District Courts conclusion that Jack
Payner [taxpayer] possessed no privacy interest in the Castle Bank documents that
were seized from [bank employee]. * * * * Nor do we. United States v. Miller, 425
U.S. 435 (1976), established that a depositor has no expectation of privacy and thus
no protectable Fourth Amendment interest in copies of checks and deposit slips
retained by his bank. Id., at 437; see id., at 442. Nothing in the record supports a
contrary conclusion in this case.
The District Court and the Court of Appeals believed, however, that a federal
court should use its supervisory power to suppress evidence tainted by gross
illegalities that did not infringe the defendants constitutional rights. The United
States contends that this approach -- as applied in this case -- upsets the careful
balance of interests embodied in the Fourth Amendment decisions of this Court. In
the Governments view, such an extension of the supervisory power would enable
federal courts to exercise a standardless discretion in their application of the
exclusionary rule to enforce the Fourth Amendment. We agree with the
Government.
III
We certainly can understand the District Courts commendable desire to deter
deliberate intrusions into the privacy of persons who are unlikely to become
defendants in a criminal prosecution. See 434 F.Supp., at 135. No court should
condone the unconstitutional and possibly criminal behavior of those who planned
and executed this briefcase caper. Indeed, the decisions of this Court are replete
with denunciations of willfully lawless activities undertaken in the name of law
enforcement. * * * *. But our cases also show that these unexceptional principles
do not command the exclusion of evidence in every case of illegality. Instead, they
must be weighed against the considerable harm that would flow from indiscriminate
application of an exclusionary rule.
- 664 -
Thus, the exclusionary rule has been restricted to those areas where its
remedial objectives are most efficaciously served. * * * *. The Court has
acknowledged that the suppression of probative but tainted evidence exacts a costly
toll upon the ability of courts to ascertain the truth in a criminal case. * * * *. Our
cases have consistently recognized that unbending application of the exclusionary
sanction to enforce ideals of governmental rectitude would impede unacceptably the
truth-finding functions of judge and jury. * * * *. After all, it is the defendant, and
not the constable, who stands trial.
The same societal interests are at risk when a criminal defendant invokes the
supervisory power to suppress evidence seized in violation of a third partys
constitutional rights. The supervisory power is applied with some caution even when
the defendant asserts a violation of his own rights. In United States v. Caceres, 440
U.S. 741, 754-757 (1979), we refused to exclude all evidence tainted by violations
of an executive departments rules. And in Elkins v. United States, 364 U.S. 206,
216 (1960), the Court called for a restrained application of the supervisory power.
[Any] apparent limitation upon the process of discovering truth in a federal
trial ought to be imposed only upon the basis of considerations which
outweigh the general need for untrammeled disclosure of competent and
relevant evidence in a court of justice. Ibid.
See also Nardone v. United States, 308 U.S. 338, 340 (1939).
We conclude that the supervisory power does not authorize a federal court
to suppress otherwise admissible evidence on the ground that it was seized
unlawfully from a third party not before the court. Our Fourth Amendment
decisions have established beyond any doubt that the interest in deterring illegal
searches does not justify the exclusion of tainted evidence at the instance of a party
who was not the victim of the challenged practices. * * * *. The values assigned to
the competing interests do not change because a court has elected to analyze the
question under the supervisory power instead of the Fourth Amendment. In either
case, the need to deter the underlying conduct and the detrimental impact of
excluding the evidence remain precisely the same.
The District Court erred, therefore, when it concluded that societys interest
in deterring [bad faith] conduct by exclusion [outweighs] societys interest in
furnishing the trier of fact with all relevant evidence. 434 F.Supp., at 135. This
reasoning, which the Court of Appeals affirmed, amounts to a substitution of
individual judgment for the controlling decisions of this Court. Were we to accept
this use of the supervisory power, we would confer on the judiciary discretionary
power to disregard the considered limitations of the law it is charged with enforcing.
We hold that the supervisory power does not extend so far.
The judgment of the Court of Appeals is
- 665 -
Reversed.
Notes on Payner
Should a criminal receive a windfall when someone elses rights are violated? The question
is whether the court should be more concerned about constraining the Governments illegal conduct
than the citizens illegal conduct. Should there be some effective remedy when the Government has
acted illegally to snare a citizen, even though his rights were not violated? Of course, the
Government as perpetrator of these illegal acts in its mission to nail the bad guys will have little
independent incentive to bring the full force of the law to bear on its own agents who violate the law.
So, the truth is that short of giving the windfall to the citizen who otherwise violated the law, there
will be little effective check on the Governments own violations of law. In this context, there is
much to be said that the cost to society of that windfall to the citizen is more than offset by the
benefit of the public by keeping Government action within proper boundaries.
Lets now bring the Governmental abuse closer to home. Can the Government mislead the
taxpayer and benefit from the fruits of that deception? I have discussed above the hazy borderline
between a civil investigation and a criminal investigation, how abuses may occur in that borderline,
and potential taxpayer benefits by suppressing evidence if the IRS crosses the line.1563
In United States v. McKee,1564 the Court addressed the substantive distinction between an
IRS civil audit and a criminal tax investigation is not always clear. As the Court noted:
The IRS splits the responsibility for enforcing the nations tax laws between
its two investigative divisions. The Criminal Investigative Division (CID) is
charged with investigating criminal violations of the tax code and related federal
statutes. CID investigators are called special agents. Like many other criminal law
enforcement agents, they carry firearms and badges. In addition, special agents must
recite an administrative warning prior to soliciting information from taxpayers. See
Beckwith v. United States, 425 U.S. 341, 343 * * * (1976) (quoting warning
provided by special agents).
On the other hand, the Examination Division of the IRS is responsible for
conducting civil tax audits. Examination Division investigators are known as
revenue agents. In contrast to special agents, revenue agents do not carry firearms;
nor are they required to provide taxpayers with an administrative warning. Although
an Examination Division audit typically concludes with some sort of civil settlement
between the IRS and the taxpayer, such an audit may uncover evidence that causes
the revenue agent to refer the case to the CID for criminal investigation. Under IRS
regulations, a revenue agent who uncovers a firm indication of fraud on the part of
the taxpayer must immediately suspend her audit and refer the case to the CID. See
1563
See particularly cases such as United States v. Tweel, 550 F.2d 297 (5th Cir. 1977);
and United States v. Peters, 153 F.3d 445 (7th Cir. 1998), cert. denied, 525 U.S. 1070 (1999).
1564
192 F.3d 535 (6th Cir. 1999).
- 666 -
Internal Revenue Manual 4565.21(1). At that point, the CID enters the case and
the IRS efforts become focused on the possibility of criminal [prosecution]. See
generally Michael I. Saltzman, IRS Practice and Procedure PP 12.01 &
12.03[1][a].1565
In McKee, the defendants, husband and wife, owned a closely held business. A disgruntled
employee contacted an IRS civil agent about potential tax violations from using corporate funds for
personal expenses. Based on that and other information, the IRS through the IRS civil agent
instituted a civil audit. The IRS instituted contact by sending a form letter requesting an
appointment, advising them that they could have an attorney present, and advising them that the
audit does not suggest a suspicion of dishonesty or criminal liability. The letter was accompanied
with IRS Publication 1, Your Rights as a Taxpayer.
The civil agent then met with the husband and questioned him regarding certain expenses
and to conduct further work, noting some suspicious circumstances. The civil agent then had a
meeting with both taxpayers, husband and wife, and obtained statements that would later be used
against them. The civil agent thereafter met with certain employees and thereafter terminated
contact with the taxpayers. The case was referred to CI and the prosecution then followed.
During the pretrial stages of the criminal investigation, the taxpayers moved to suppress the
information obtained during the interviews. The district court denied the motion. The husband then
plead guilty, subject to preserving the right to appeal the district courts denial of the motion. The
appeal ensued. The following are pertinent excerpts from the courts opinion on the appeal:
McKee argues that her conviction is invalid for two reasons: (1) Loges should
have turned the investigation over to the CID earlier than she actually did; and (2)
Loges did not complete the Form 2797" report in the course of her investigation.
Both of these theories share the same underpinning-that Loges failed to comply with
the relevant provisions contained in the IRSs Internal Revenue Manual (hereinafter
Manual). Although neither McKee nor the government raises the point, we must
initially address whether a taxpayer may properly base a challenge to a tax
conviction on the IRSs alleged noncompliance with the procedures of its Manual.
At first glance, our precedent suggests not. [Citations omitted]
However, we believe that the Manuals provisions are, at the very least,
relevant in determining whether a taxpayers constitutional rights have been
offended. In United States v. Caceres, 440 U.S. 741 * * * (1979), the Supreme Court
ruled that evidence obtained in violation of the Manuals provisions against
recording interviews did not fall within the exclusionary rule because those particular
violations of the Manual did not infringe on constitutional rights. Id. at 755-56.
Caceres, however, only rejected a per se rule that every violation of the Manual was
1565
Id., pp.537-8, quoting United States v. Peters, 153 F.3d 445, 447 (7th Cir. 1998), cert.
denied, 142 L. Ed. 2d 663, 119 S. Ct. 801 (1999).
- 667 -
tantamount to a due process violation. The Court did leave open the possibility that
a federal court may enforce the Manuals provisions when compliance with the
[provision] is mandated by the Constitution or federal law. Caceres, 440 U.S. at
749.
Several circuits adhere to the view that a conviction may be overturned if the
IRS is found to have violated a provision in its Manual designed to protect the
constitutional rights of taxpayers. United States v. Horne, 714 F.2d 206, 207 (1st
Cir. 1983) (per curiam); accord United States v. Leahey, 434 F.2d 7, 10-11 (1st Cir.
1970) (allowing due process claim where Special Agent failed to give taxpayer
certain warnings as provided in Manual that he was the subject of a criminal
investigation). Although the quoted portion of Horne was only dicta in the opinion,
we do note that then-Judge Breyer was a member of the Horne panel, and we afford
deference to his views. Moreover, the Seventh and Eighth Circuits have opined that
a taxpayer may challenge a conviction by relying on the Manuals provisions, so
long as the taxpayers challenge was based on an alleged violation of a constitutional
right. See Peters, 153 F.3d 445 at 451-52 n.9; United States v. Grunewald, 987 F.2d
531, 534 & n.3 (8th Cir. 1993). We approve of these approaches, and we will
proceed accordingly.
IRS regulations explicitly prohibit a revenue agent from developing a
criminal case against a taxpayer under the guise of a civil investigation. See United
States v. Powell, 835 F.2d 1095, 1100 n.12 (5th Cir. 1988) (citing Internal Revenue
Manual, 9311.83(1)). McKee first argues that Agent Loges knew or at least
strongly suspected from the outset that McKee had committed criminal tax
violations, and only went through the guise of a civil audit to collect evidence for a
criminal prosecution against her and her husband. Although McKee voluntarily
complied with all of Logess document and record requests, a consensual search is
unreasonable under the Fourth Amendment or violative of due process under the
Fifth Amendment if the consent was induced by fraud, deceit, trickery or
misrepresentation by the revenue agent. Peters, 153 F.3d 445 at 451; accord
Powell, 835 F.2d at 1098.
McKees argument that her constitutional rights were violated relies
heavily on certain provisions of the Manual, which direct the revenue agent to
suspend her civil investigation and turn the matter over to the CID once she has
developed a firm indication of fraud warranting a criminal investigation. The
firm indication of fraud rule is located in various provisions of the Manual,
including 4565.21(1), which states:
If, during an examination, an examiner [i.e., revenue agent] uncovers
a potentially fraudulent situation caused by the taxpayer and or the preparer,
the examiner shall discuss the case at the earliest possible convenience with
- 668 -
his/her group manager. . . . Once there is a firm indication of criminal fraud

all examination activity shall be suspended.
Internal Revenue Manual 4565.21(1) (August 1, 1996). The Manual further
outlines typical Badges of Fraud that the revenue agent can identify during the
course of her investigation. Such Badges of Fraud include: understatement of
income; claiming fictitious or improper deductions; accounting irregularities;
improper allocation of income; and suspicious acts or conduct by the taxpayer. See
id. 4231 HB 940 (April 23, 1981).
We are satisfied that the Manuals rule, requiring suspension of a civil
investigation once the revenue agent has a firm indication of fraud, is the type of
rule that is designed to protect the taxpayers constitutional rights. As the Eighth
Circuit cogently explained: Significantly different rights, responsibilities, and
expectations apply to civil audits and criminal tax investigations. It would be a
flagrant disregard of individuals rights to deliberately deceive, or even lull,
taxpayers into incriminating themselves during an audit when activities of an
obviously criminal nature are under investigation. Grunewald, 987 F.2d at 534; see
also Peters, 153 F.3d at 452 (if a revenue agent continues to conduct a civil audit
after developing firm indications of fraud, a court may justifiably conclude that the
agent was in fact conducting a criminal investigation under the auspices of a civil
audit). For these reasons, we agree that compliance with 4565.21 is mandated by
the Constitution. But see Groder, 816 F.2d at 142 (classifying 4565.21 as
essentially a procedural rule conferring no substantive rights or privileges upon
taxpayers).
Although we have not had occasion in recent years to address the implication
of a taxpayers Fourth and Fifth Amendment rights during a civil IRS audit, we have
done so in the past. This court has noted that generally an affirmative
misrepresentation by an IRS agent that the investigation is routine when in fact it is
a criminal investigation requires suppression of evidence. United States v. Nuth,
605 F.2d 229, 234 (6th Cir. 1979). The Nuth court also stated that the evidence will
be suppressed only upon a clear showing that the taxpayer was tricked or deceived.
Id.; see also United States v. Allen, 522 F.2d 1229, 1233 (6th Cir. 1975) (In the
absence of a clear showing that the taxpayer has been tricked or deceived by the
government agents into providing incriminating information, the documents and
statements obtained by the Internal Revenue agents are admissible.); Marra, 481
F.2d at 1203. From these precedents, it is incumbent upon McKee to show, by clear
and convincing evidence, that (1) Loges made affirmative misrepresentations in the
course of her investigation, and (2) because of those misrepresentations, McKee
disclosed incriminating evidence to the prejudice of her constitutional rights. McKee
can satisfy her burden, as a practical matter, by showing that Loges knowingly failed
to comply with the Manuals suspension-of-investigation rules. Cf. United States
- 669 -
v. Wadena, 152 F.3d 831, 851 (8th Cir. 1998), cert. denied, 1999 U.S. LEXIS 2351,
119 S. Ct. 1355 (1999); accord Tweel, 550 F.2d at 299.
Whether or not Loges had a firm indication of fraud and failed to suspend the
civil audit is a question of fact to be reviewed for clear error. Wadena, 152 F.3d at
851. Upon review of the record, we cannot afford McKee the relief she seeks.
McKee argues that Loges should have referred the case to the CID
immediately, and should never have undertaken the civil investigation at all. McKee
contends that Loges had the requisite firm indication of fraud on the part of the
McKees when she received detailed information from two different Valley Electric
employees (one of whom she knew to be a credible informant) alleging the same tax
violations. Thus, McKee reasons, Logess entire civil investigation was a sham, and
her true purpose was to gather evidence in hopes of eventually seeking criminal
prosecution.
McKees position leaves us unconvinced. We have no doubt that the IRS
receives tips alleging tax violations, such as those provided to Loges on a daily
basis from disgruntled employees, jilted spouses, or civic-minded citizens. That
Loges received information alleging the same tax violations on the part of the
McKees from two separate sources is hardly damning because the allegations were
not substantiated by documentary evidence, nor any other evidence supporting a
conclusion that McKee intended to evade her tax obligations. See, e.g., Internal
Revenue Manual 4565.21(1) (A firm indication of fraud is more than mere
suspicion or first indication of fraud, it is a factual determination which must be
made on a case by case basis.); Peters, 153 F.3d at 455 (it is the taxpayers intent
to evade taxes that differentiates a criminal violation from a civil case). The Manual
itself emphasizes the point:
(1) The second basic fact which the Government must prove to
establish fraud is that the understatement of tax liability was due to deliberate
intent to evade tax. The fact that income was understated does not, standing
alone, prove that such understatement was intentional. A failure to report the
correct income may be due to mistake, inadvertence, reliance on professional
advice, honest difference of opinion, negligence, or carelessness, none of
which constitutes the deliberate intent to defraud.
(2) Intent to evade tax occurs when a taxpayer knows that the
misrepresentation is false. Intent is a mental process; a state of mind. It is
necessary to judge a taxpayers intent by actions. The things that a person
says or does are assumed to be the natural consequences of the persons
intention.
Internal Revenue Manual, 4231 HB 933 (April 23, 1981).
- 670 -
Only the most overzealous revenue agent would have considered referring
the McKees case to the CID as a result of the information provided by Pique and the
other source. As several courts have properly recognized, a major function of a civil
audit is to allow the taxpayer a chance to explain the discrepancies in his tax reports.
See Peters, 153 F.3d at 455; United States v. Caldwell, 820 F.2d 1395, 1402-03 (5th
Cir. 1987); Groder, 816 F.2d at 143; United States v. Kaatz, 705 F.2d 1237, 1243
(10th Cir. 1983) (revenue agent need not refer case to CID in face of unanswered
questions). While it is conceivable that a revenue agent may be presented with such
overwhelming evidence of tax fraud that the only reasonable conclusion is that the
taxpayer willfully set out to evade his tax responsibilities, and the case should be
submitted to the CID immediately without a inquiry from the Examination Division,
McKees circumstances do not give rise to such an extraordinary situation. Far from
disregarding the Manuals provisions, Loges acted in complete conformance with
them by contacting the McKees and offering them the chance to account for the
improprieties alleged by Pique and the other anonymous source.
In the alternative, McKee contends that Loges should have terminated her
investigation shortly after September 24, 1992 - the date of her second interview with
Mr. McKee. On or within a few days after that date, Loges was targeting and
questioning specific entries in Valley Electrics ledger and asking for documentation
to support the entries. Mr. McKee also presented Loges with some records
indicating that certain items had been left out of the employee loan account.
In hindsight, it might have been preferable for Loges to transfer the matter
to the CID after September 1992. However, as nearly every court addressing these
very issues has observed, courts must defer to the discretion of revenue agents as to
whether an initiation of a criminal investigation is warranted. See Peters, 153 F.3d
at 453 & n.11 (collecting cases). Loges testified before the magistrate judge that, in
her experience, she generally double checks her work and gives taxpayers under
investigation the benefit of the doubt and any opportunity at all to answer the
question when she uncovers possible tax discrepancies. J.A. at 522. Given the
deference that IRS agents must be afforded to carry out their official duties, we
cannot say that Loges abused her discretion in continuing the investigation of the
McKees and seeking explanations for the discrepancies after September 1992.
We reach this conclusion reluctantly. It is particularly troubling that almost
all of the governments evidence against the McKees was practically handed to the
CID on a silver platter as a result of the civil investigation. Cases involving similar
factual scenarios as the one sub judice are not in short supply. See Peters; Wadena;
Grunewald; Powell; Michaud; Caldwell; Groder; Kaatz; United States v. Piper, 681
F. Supp. 833 (M.D. Ga. 1988). We recognize that revenue agents are not charged
with criminal law enforcement. Nevertheless, as this case exemplifies, the reality is
that revenue agents sometimes perform the same functions of evidence gathering as
their CID counterparts, and such evidence is often admissible at a criminal trial.
- 671 -
Our nations tax collection system is based on voluntary compliance. See

Groder, 816 F.2d at 144; Tweel, 550 F.2d at 300. If the IRSs internal operating
procedures afford anything less than faithful adherence to constitutional guarantees,
then public confidence in the IRS will necessarily be undermined. While we agree
that the IRSs firm indication of fraud rule comports with the requirements of the
Constitution, we do encourage revenue agents to err on the side of protecting
taxpayers constitutional rights when they conduct their investigations.
[Form 2797 discussion omitted; basically same analysis]
In response to the risk of courts intervention when the civil cases have proceeded too far,
the IRS has published guidance in the Fraud Handbook in the IRM.1566 Briefly, they require that the
compliance offices consult with the divisions Fraud Referral Specialist in all cases involving
potential criminal fraud and even the application of the civil fraud penalty. The Handbook
differentiates between fraud indicators and affirmative acts and requires development of a plan
as early as possible. The plan will include an interview with the taxpayer if possible, and a referral
made only if the investigation indicates that the taxpayer intended to defraud through identified
affirmative acts. The referral is made to a so-called CI Lead Development Center which do the
initial vetting for consistency with the IRSs National Compliance Strategy. The CI agent in the
LDC then coordinates with the referring compliance function to see which matters should be
pursued by CI.
B.
Violation of Government Procedures.
We reviewed the Caceres case elsewhere. That case held that a taxpayer does not gain any
rights when the Government fails to honor an internal procedure that might have benefited the
taxpayer. You will see the application of Caceres throughout the materials; indeed you have just
seen it in McKee. Another example is Kelly where the taxpayer contended that the Governments
use of 7212 rather than a more specific tax crime violated Government policy in the DOJ Criminal
Tax Manual.
The Caceres holding would not be applicable if the internal policy were simply a reflection
of constitutional or legal imperatives independent of the administrative policy. In such a case, the
taxpayer could rely upon those independent constitutional or legal imperatives and might be able
to frame an argument that the internal policy should be controlling on the Government where
designed to implement the constitutional or legal imperatives. Further, as McKee suggests, the
Caceres rule should not be applicable if the internal policy were designed to protect constitutional
or legal imperatives in the administrative setting.
C.
Selective Enforcement Defense.
As I have noted, the federal tax criminal system is based on careful selection of cases that
are investigated and then prosecuted. Occasionally, defendants will assert that tax prosecutions are
1566
See IRM 25.1.1.1.
- 672 -
based on constitutionally impermissible selection criteria. These arguments rarely succeed, but
courts do acknowledge that they might if the taxpayer can show that others similarly situated are not
prosecuted and that the selection of those who are prosecuted including specifically the defendant
making the argument are based on constitutionally impermissible selection criteria such as race,
gender or the intent to inhibit the exercise of constitutional rights.1567
This is an argument frequently asserted by protestors who wrap their tax evasion schemes
in the mantle of constitutional arguments. The IRS does, of course, a higher percentage of tax
protestors than of the general population. But, given the fact that tax protestors can cumulatively
undermine the system far beyond their own tax liabilities, courts have held that selecting tax
prosecutors for prosecution is a rational and constitutionally permissible selection.1568
One variation of this argument has recently been bandied about. This is the so-called
Geithner defense. Timothy Geithner, you will recall, is the Secretary of Treasury who, during
confirmation hearings, disclosed that he had failed to pay taxes on certain of his income. He was
not only not prosecuted or even investigated by the IRS independently of his confirmation
investigation, he was confirmed for the cabinet position. These arguments fail.1569
Another variation of the argument is a vindictive prosecution that the defendant was
selected for prosecutions for reasons of vindictiveness rather than legitimate law enforcement
priorities.1570 This is a due process violation.
1567
United States v. Berrios, 501 F.2d 1207, 1211 (2d Cir. 1974).
E.g., United States v. Amon, 669 F.2d 1351 (10th Cir. 1981), cert. denied, 459 U.S.
825 (1982). However, the dissenter was persuaded that the selection was targeted at the exercise
of constitutional rights and thus was impermissible. The line is assuredly a fine one, but the reality
is that the system would fail if tax protestors whose constitutional claims are typically frivolous
could not be prosecuted on a selective basis. This factor is probably a variation of the limitation on
the right to yell FIRE!!! in a crowded theater. For further reading, see Steve R. Johnson, The
Selective Enforcement Defense in Civil and Criminal Tax Cases, ABA Section of Taxation News
Quarterly (2008), discussing this issue and noting the related issue of an IRS duty of consistency.
1569
E.g., United States v. Hendrickson, 664 F. Supp. 2d 793, 806 n. 16 (ED MI 2009)
(making the argument generally and specifically with respect to Geithner but turning the argument
against the taxpayers selective prosecution argument). The Geithner phenomenon could even give
rise to a variant that I call the tax software or, more narrowly, a Turbotax defense. Geithner testified
that he used Turbotax and, while saying the problem was his rather than his Turbotax softwares
problem, did say that Turbotax did not bring to his attention that he should pay more tax. In a civil
penalty context, the argument also fails at least where the taxpayer should know better. E.g., Lam
v. Commissioner, T.C. Memo. 2010-82.
1570
E.g., Blackledge v. Perry, 417 U.S. 21, 28-29 (1974). Melodie Bales, Opening the
Umbrella: The Expansion of the Prosecutorial Vindictiveness Doctrine in United States v. Jenkins,
59 Cath. U. L. Rev. 855 (2010).
1568
- 673 -
IV.
Discovery of the Governments Case.

A.
The Problem
A cardinal principle of our criminal justice system is that the discovery rights we take for
granted in civil litigation are not available in criminal litigation. The taxpayers Fifth Amendment
privilege would block the Government from getting discovery of the most important information
from the defendant. And, under the historical rules, the defendant has very little discovery from the
Government.
B.
Practitioner Vigilance.
The best discovery is practitioner vigilance moving quickly to know all the material facts
from sources that are available and keeping track of what the investigators know. Stay one step
ahead of them and, if that cant be done, no more than one step behind them.
C.
Administrative Disclosures.
The practitioner should keep avenues of communication open with the investigators and
prosecutors in order to learn as much as possible about the Governments case. We have noted
above1571 the use of the conferences with CI, DOJ Tax and the AUSA, as appropriate for the stage
of the investigation or prosecution.
D.
Freedom of Information Act.
The Freedom of Information Act (FOIA) (5 U.S.C. 552) and the companion Privacy Act
(PA) offer another avenue to discover at least portions of the Governments case. The basic
concept of FOIA is that citizens should have the right to know how their Government operates. The
basic concept of the Privacy Act is that a citizen should know what the Government records say
about him. These two acts are different in focus but share the underpinning that knowledge of
Government in a free society is a good thing. Knowledge is power. In a democracy, citizens
knowledge is their power against an abusive government.
In a criminal case, the target and his lawyer would want ideally to see everything in the
Governments files. Just as in any other type of adversary proceeding (including civil trials),
knowing everything the other side knows is critical. Yet, historically, criminal investigations and
trials offer the target limited ability to discover the other Governments files (and, correspondingly,
the Government has limited ability to discover the targets files). Although FOIA is not a litigation
discovery alternative, FOIA does reflect the same policies regarding precluding access to criminal
investigation files.
1571
- 674 -
In pertinent part, FOIA provides a general rule of citizen right to access of agency files and
document. Section 5 U.S.C. 552(a). But, FOIA provides exceptions, referred to as Exemptions,
including Exemption 7 as follows (5 U.S.C. 552(b)(7)(A)):
(7) records or information compiled for law enforcement purposes, but to the
extent that the production of such law enforcement records or information (A) could
reasonably be expected to interfere with enforcement proceedings, (B) would deprive
a person of a right to a fair trial or an impartial adjudication, (c) * * * (D) could
reasonably be expected to disclose the identity of a confidential source, including a
State, local, or foreign agency or authority or any private institution which furnished
information on a confidential basis, and, in the case of a record or information
compiled by a criminal law enforcement authority in the course of a criminal
investigation, or by an agency conducting a lawful national security intelligence
investigation, information furnished by a confidential source, (E) would disclose
techniques and procedures for law enforcement investigations or prosecutions, or
would disclose guidelines for law enforcement investigations or prosecutions if such
disclosure could reasonably be expected to risk circumvention of the law, or (F)
could reasonably be expected to endanger the life or physical safety of any
individual;
Notice that, at least theoretically, virtually all of a criminal investigatory file (the files
compiled by CI and by DOJs CES) are likely compiled for law enforcement purposes (see
Exemption 7(A)). This will be the exemption most frequently invoked when a FOIA request is
made with a criminal investigation or prosecution in the background.1572
Protecting informants confidentiality, however, is a high priority for criminal investigators.
In United States Department of Justice v. Landano, 508 U.S. 165 (1993), the Court held, consistent
with FOIA generally, that the informant exception, often referred to as the Exception 7(D), was to
be narrowly construed. Specifically, in order to invoke Exemption 7(D), the investigating agency
must show that the informant had supplied information under an express assurance of confidentiality
or circumstances where such an assurance was necessarily implied if not express. The Court noted
in this regard that an assurance of confidentiality did not mean an absolute assurance, for
confidential informants often are required ultimately to testify at trial even if given some assurance
of confidentiality. Should the matter be prosecuted, of course, the target (who is then a defendant)
will have an opportunity for the limited discovery offered under the Federal Rules of Criminal
Procedures and such doctrines as Brady.
Usually invoked with Exemption 7(A) in the context of a criminal investigation or
prosecution is Exemption 3 which exempts documents specifically exempted . . .by statute.
552(b)(3). Section 6103(a) of the Internal Revenue Code characterizes returns and return
information as confidential, subject to certain exceptions. One of the exceptions to compelled
confidentiality requires disclosure to the taxpayer, but only if the Secretary determines that such
1572
For an example, see Shannahan v. Internal Revenue Service, 672 F.3d 1142 (9th Cir.
2012).
- 675 -
disclosure would not seriously impair Federal tax administration. 6103(e)(7). Exemption 3 is
thus likely to be invoked in addition to Exemption 7(A) to preclude access to the criminal
investigation or prosecution files.1573
Although these Exemptions would seem to create an insuperable roadblock to using FOIA
to blasting out documents for use in a defending in a criminal investigation or prosecution, it does
not hurt to ask. Given FOIAs purpose to narrowly construe the exemptions, most of the raw data
in those files may be obtained in a FOIA request. For example, if a civil audit preceded the criminal
audit, much of the documents compiled in the civil audit would arguably not have been compiled
for law enforcement purposes. As a practical matter, while a criminal tax investigation is being
pursued by the IRS or by DOJs CES, a FOIA request will likely draw out much of the underlying
documents (other than the documents generated by CI or DOJ in the criminal investigation itself).1574
In framing the FOIA request, the taxpayer will want to identify the records requested. The
practitioner should consider requesting
E.
All memoranda and interview notes of taxpayer interviews, practitioner contacts and
third party interviews.
All documents gathered in the investigation (or a limited subset if the facts so
warrant).
the Agents daily activity report and examination history record if there has been a
civil audit involved.
Trial Discovery.
1.
Federal Rules of Criminal Procedure.
At the trial stage, FRCrP 16 allows the Defendant limited discovery of aspects of the
Governments case. Since these discovery rights are not unique to tax cases, I do not discuss them
here. The student should be aware that pre-trial and trial discover rights are available.
1573
For an example, see also Shannahan v. Internal Revenue Service, 672 F.3d 1142 (9th
Cir. 2012).
1574
Any FOIA remedy might be denied if the requesting party is a fugitive i.e., outside
the United States in order to avoid being brought to trial on criminal charges. See Shannahan v.
Internal Revenue Service, 672 F.3d 1142 (9th Cir. 2012). In Shannahan, DOJ invoked the fugitive
disentitlement doctrine under which, when applicable, denies a fugitives affirmative use of civil
judicial remedies related to the criminal case. This is a judicial doctrine of uncertain scope (with
a much more limited statutory counterpart, 28 U.S.C. 2466, applying to civil foreclosure
proceedings related to the criminal case). The Ninth Circuit declined to address the doctrine, since
Exemptions 3 and 7(D) supported the denial of disclosure of the documents in question.
- 676 -
2.
Brady and Related Material.

a.
Brady and Giglio.
Based on concepts of due process and the special role of the prosecutor, the prosecutor must
disclose to the defendant are certain types of evidence.1575 So-called Brady1576 material and Giglio1577
material must be made available by trial. Brady requires a prosecutor to disclose to the defense
material information known or reasonably knowable to the prosecutor that is exculpatory (favorable
to the defendant) or potentially useful for impeachment of government witnesses.1578 I emphasize
the word material, for it does not require the prosecution to disclose all exculpatory and
impeachment material; it need disclose only material that, if suppressed, would deprive the
defendant of a fair trial.1579 Giglio disclosure is material that may be used for impeachment,
including most prominently, agreements that have been reached with prosecution witnesses.1580 No
specific request for Brady material is required, but it is good form to make the request early, in
writing, and, in some cases, often.
One possible aspect to explore in the context of Brady and Giglio is the possible
impeachment of expected key prosecution witnesses with regard to credibility issues presented by
their failure to meet their own tax obligations. FRE 608(b) provides:
(b) Specific instances of conduct. Specific instances of the conduct of a witness, for
the purpose of attacking or supporting the witness' character for truthfulness, other
than conviction of crime as provided in rule 609, may not be proved by extrinsic
evidence. They may, however, in the discretion of the court, if probative of
truthfulness or untruthfulness, be inquired into on cross-examination of the witness
(1) concerning the witness' character for truthfulness or untruthfulness, or (2)
1575
Strickler v. Greene, 527 U.S. 263, 280-81 (1999).

Brady v. Maryland, 373 U.S. 83 (1963). see e.g., Leka v. Portuondo, 257 F.3d 89,
98 (2d Cir. 2001) (alterations in original) (quoting United States v. Avellino, 136 F.3d 249, 255 (2d
Cir. 1998) (summarizing the Brady obligation). As to materiality, see United States v. Bagley, 473
U.S. 667, 678 (1985); and United States v. Agurs, 427 U.S. 97, 108 (1976). Prosecutors should also
consider certain ethical rules imposing a similar obligation but not limited by Bradys materiality
requirement for the constitutional obligation. See ABA Model Rules of Professional Conduct Rule
3.8(d); and ABA Criminal Justice Standards, Prosecution Function Standard 3-3.11.
1577
Giglio v. United States, 405 U.S. 150 (1972). Whether the Giglio obligation extends
beyond agreements to implicit plea agreements or understandings that, for whatever reason, are
not incorporated into a binding written agreement. See Peter A. Joy & Kevin C. McMunigal,
Implicit Plea Agreements and Brady Disclosure, Criminal Justice (22 Criminal Justice 50 (2007).
1578
E.g., United States v. Gil, 297 F.3d 93, 101-105 (2d Cir. 2002); see Strickler v.
Greene, 527 U.S. 263 (1999).
1579
United States v. Coppa (In re United States), 267 F.3d 132, 135 (2d Cir. 2001)
(internal quotations omitted).
1580
See also FRCrP 16.
1576
- 677 -
concerning the character for truthfulness or untruthfulness of another witness as to

which character the witness being cross-examined has testified.
A witness who filed a fraudulent return (say omitting income that he or she knew should have been
included) has committed a serious act of untruthfulness even though he or she may have not been
convicted of the crime. Defense counsel should be able to inquire into that misconduct bearing on
his or her character for truthfulness. And, to back that up to the Brady and Giglio pre-trial
obligations, defense counsel might want to remind the Government that it should specifically check
into that potential with respect to key Government witnesses so that proper disclosure can be made
and proper cross-examination pursued.1581
The concept of Brady is a good one. But many believe that it does suffer in the
implementation. The articles lamenting the problems are legion, but here is a fair compilation of
the three major problems:
Brady is applied retrospectively. There is never a real Brady violation unless
nondisclosure was so serious that a post-trial review leads judges to conclude that it
undermined their confidence in the verdict. This materiality prong of Brady narrows
the prosecution's broad duty of disclosure. It does not require disclosure of all
exculpatory or impeaching information. It allows prosecutors to suppress
exculpatory information, betting that in hindsight it will not be material to the case.
Viewed retrospectively, materiality is something on which prosecutors and defense
lawyers rarely agree, and on which appellate judges often produce "split" opinions.
Second, even when prosecutors recognize that information is material,
Brady does not require its immediate production. For tactical reasons, prosecutors
may delay disclosure, sometimes to the eve of trial, betting that delay will not
materially prejudice the defense and will preserve an advantage for the
prosecution. The Court of Appeals for the Second Circuit expressly approved that
sort of gamesmanship. In a complex prosecution, an experienced trial judge ordered
production of Brady material at the outset of the proceedings. The court of appeals
granted a government mandamus petition, setting aside the order and permitting the
government to decide when disclosure was appropriate. The timing problem is
worse for a person who pleads guilty. Prosecutors are not required generally to
furnish exculpatory information to a defendant for defense use in plea bargaining.
As part of a plea agreement, prosecutors may extract Brady waivers, at least for
material impeachment evidence.
1581
In United States v. Moore, 2011 U.S. Dist. LEXIS 66257 (ED VA 2011), the court
permitted defense counsel to inquire into the witnesses omission of income from returns but refused
to allow inquiry into failure to file returns. Of course, as the rule indicates, the judge has
considerable discretion into this line of inquiry. But at the Brady and Giglio discovery stages, it
would seem that the prosecutors should be required to produce the information because of the
uncertainty as to whether the judge would allow the line of inquiry as to particular witnesses.
- 678 -
The third major problem stems from the Supreme Court's use of the phrase
exculpatory or mitigating evidence. It has led some prosecutors to argue that
exculpatory information need not be disclosed unless it is admissible evidence. There
is no uniform approach in the federal courts to the treatment of inadmissible evidence
as the basis for Brady claims.1582
b.
Jencks Act.
The Jencks Act (18 U.S.C., 3500) requires, upon request, production of Government
witness statements concerning the subject of their testimony on direct examination. The Jencks Act
requirements appear in Rule 26.2 of the Federal Rules of Criminal Procedure. The production is
required after the witness has testified.
Among the materials subject to the Jencks Act are the portions of (i) the SAR that relate to
the Special Agents testimony if given at trial1583 and (ii) grand jury testimony that relates to the
Special Agents testimony at trial.1584
c.
Combined Brady and Jencks Act Materials.
Information covered by both Brady and the Jencks Act is subject to the timing requirements
of Jencks Act.1585 However, in both cases (Brady and Jencks Act), the requests should be made
sooner rather than later. Jencks Act materials should also be requested early, in writing and, in some
cases, often, and in all cases no later than the conclusion of the testimony of each witness. Some
AUSAs will voluntarily produce early in order to make the trial more efficient, and some judges
will require the production of the required material earlier for the same reason.1586
d.
Tough Calls on Disclosure.
One question that has arisen in the application of Brady, Giglio and Jencks Act is whether
the prosecutors or their agents can avoid creating documents of the type that might otherwise have
been created in normal course except for the fact that it wanted to avoid having to turn over the
1582
Irwin H. Schwartz, Beyond Brady: Using Model Rule 3.8(D) in Federal Court for
Discovery of Exculpatory Information, 34, 34-35 Champion 34 (2010) (some internal quotation
marks and indication omitted for readability and footnotes omitted). For a thoughtful consideration
of the current Brady practice and urging an open file policy (which I discuss below), see Alafair S.
Burke, Revisiting Prosecutorial Disclosures, 84 Ind. L. J. 481 (2009).
1583
United States v Cleveland, 507 F2d 731 (7th Cir. 1974).
1584
18 U.S.C. 3500(e)(3).
1585
United States v. Jones, 612 F.2d 453, 455 (9th Cir. 1979); United States v. Alvarez,
358 F.3d 1194, 1211 (9th Cir. 2004).
1586
See United States v. Compagnuolo, 592 F.2d 1979); United States v. Murphy, 569
F.2d 771, 794 (3rd Cir. 1977), cert. denied, 435 U.S. 995 (1978).
- 679 -
documents as Brady material. In a recent case,1587 the lack of note taking may or may not have been
deliberate, but notes were not taken. In a pre-trial interview, the Governments investigators
interviewed a witness who, at trial, testified that she lied about everything during the interview.
Defense counsel demanded the interview notes and substance of the interview session. The
prosecutors denied having notes and refused to advise defense counsel as to the substance. The
Second Circuit held: (1) neither Brady nor the Confrontation Clause require the prosecutors or their
agents to take notes in an interview session, and (2) notwithstanding the absence of notes, if the
information known to the Government from the interview were of the type that would require
disclosure if it were captured in a document and the information is known to the Government, the
information must be disclosed. The Court nevertheless remanded to the district court to determine
whether the Governments sua sponte elicitation on direct examination that she had lied in the
interview sufficiently notified the defense for purposes of cross-examining.
e.
Open File Policy.
Some federal prosecutors in criminal tax cases maintain an open file policy whereby they
permit the defense access to the file except, in some cases, certain narrowly excluded documents
based on clear legal justification. The notion is that, with access to the files, the defendant cannot
complain that he or she did not receive a fair trial because information was withheld. Most
obviously, this generally will satisfy the prosecutors Brady, Giglio, and Jencks Act obligations to
disclose potentially exculpatory or impeaching information.1588
f.
The Document Dump Via Open File.
Incident to an open file practice, the prosecutor might just do a massive document dump on
the defense in a way that could practically preclude or put severe burdens on the defense from
making meaningful use of the disclosed documents. In large document cases (white collar cases
generally and tax crimes cases in particular), prosecutors often do this to show that they are not
hiding anything from a defendant and thereby claim to meet any more specific disclosure obligation
such as Brady. Consider the following from a tax shelter prosecution:
Defendants contend that the Government cannot discharge its Brady
obligations by turning over exculpatory documents as part of a voluminous file that
is unduly onerous to access. Def. Reply Mem. at 2 (quoting United States v.
Skilling. 554 F.3d 529, 577 (5th Cir. 2009), aff'd in part and vacated on other
grounds, 130 S. Ct. 2896, 177 L. Ed. 2d 619 (2010)). In this case, defendants note
that the database that the government produced comprises several gigabytes of data,
including millions of separate files extending to several million pages in length.
[Moreover], the database consists of nine separate databases . . . [, and any]
document search has to be conducted on a database-by-database basis. Id.
Defendants cite United States v. Salyer, Cr. No. S-10-0061 LKK (GGH), 2010 WL
1587
United States v. Rodriguez, 496 F.3d 221 (2007).

For an argument that an open file policy should be required, see Alafair S. Burke,
Revisiting Prosecutorial Disclosures, 84 Ind. L. J. 481 (2009).
1588
- 680 -
3036444 (E.D. Cal., Aug. 2, 2010), to the effect that the government cannot meet
its Brady obligations by providing [the defendant] with access to 600,000 documents
and then claiming that she should have been able to find the exculpatory information
in the haystack. Id. at *6 (quoting United States v. Hsia, 24 F. Supp. 2d 14, 29-30
(D.D.C. 1998), rvs'd in part on other grounds, 176 F.3d 517 (D.C. Cir. 1999)). Thus,
defendants maintain that even though all of the documents at issue were available for
inspection upon request and all but a handful were included as part of the pretrial
electronic discovery, the Government violated Brady because the materials were
unduly onerous to access.
However, the principal case defendants cite in support of this proposition,
United States v, Skilling, 554 F.3d 529, 577 (5th Cir. 2009), is far more nuanced that
defendants suggest. The Fifth Circuit first noted that there is little case law on
whether a voluminous open file can itself violate Brady, and the outcomes of these
cases seem to turn on what the government does in addition to allowing access to a
voluminous open file. 554 F.3d at 577. In Skilling, the Government did much more
than drop several hundred million pages on Skilling's doorstep. Id. Instead, the file
was electronic, indexed, and searchable, and the Government highlighted particularly
relevant documents. Id. Although Skilling argued that the Government should have
scoured the open file in search of every piece of potentially exculpatory evidence,
the Court determined that the Government was in no better position to locate any
potentially exculpatory evidence than was Skilling. Id. Thus, although the Court did
not hold that the use of a voluminous open file could never violate Brady, especially
if there were evidence that the government padded an open file with pointless or
superfluous information to frustrate a defendant's review of the file, the Court
determined that, in light of the additional steps the government took beyond merely
providing Skilling with the open file, the equal access that Skilling and the
government had to the open file, the complexity of Skilling's case, and the absence
of evidence that the government used the open file to hide potentially exculpatory
evidence or otherwise acted in bad faith, we hold that the government's use of the
open file did not violate Brady. Id.
The general principles articulated by the Skilling court are particularly
relevant here. Undoubtedly there were many documents not least because of the
efforts that the defendants and their coconspirators took to obscure their egregious
fraud but the Government, to facilitate review of the documents, provided defense
counsel with an electronically searchable Concordance database. Both the
Government and defense counsel had equal access to this database. Thus, the
defendants were just as likely to uncover the purportedly exculpatory evidence as
was the Government. Moreover, as a general rule, the Government is under no duty
to direct a defendant to exculpatory evidence within a larger mass of disclosed
evidence. See United States v. Mulderig, 120 F.3d 534, 541 [5th Cir. 1997); United
States v. Alvarado, No. 01 Cr. 156 (RPP), 2001 U.S. Dist. LEXIS 21100, at *13-14
(S.D.N.Y. 2001) (The Defendants have pointed to no authority for the proposition
- 681 -
that where there is a large mass of material that has been made available to the
Defendants, it is the Government's duty to root out Brady material for the
Defendants. Indeed the only authority is to the contrary.)
The defendants further argue that, notwithstanding the equal access of both
sides to the database in question, the Government may have a heightened obligation
to uncover exculpatory evidence in light of its allegedly extensive resources and
subpoena powers. See 01/13/11 Transcript. The Court rejects this argument. While
the Supreme Court in Brady held that the Government may not properly conceal
exculpatory evidence from a defendant, it does not place any burden upon the
Government to conduct a defendant's investigation or assist in the presentation of the
defense's case. United States v. Marrero, 904 F.2d 251, 261 (5th Cir. 1990). Placing
a higher burden on the Government to uncover such evidence would place
prosecutors in the untenable position of having to prepare both sides of the case at
once. Indeed, the adversarial system presumes that the defense will be more highly
motivated to uncover exculpatory evidence, so if anything the onus is on defense
counsel to conduct a more diligent search for material potentially favorable to his
client. This is especially true considering that, if exculpatory evidence exists, the
defense is in the best position to know what such evidence might be and where it
might be located.
As the Court noted in United States v. Skilling, 554 F.3d 529, 577 [5th Cir.
2009), exceptions to these general principles may exist if it is found that the
Government deliberately hid documents within a larger mass of materials or
somehow purposefully confounded the defendant's search for exculpatory material.
As this Court previously found, however, see 01/13/11 Transcript at 26, there is no
evidence of bad faith that has been proffered in this case. Accordingly, the Court
holds that the Government did not violate Brady by failing to specifically highlight
the particular documents defendants now claim are relevant to the defendants'
case.1589
The inquiry, therefore, is therefore a practical case by case inquiry into the quantum and usefulness
of the disclosures and what practical steps the prosecutors have done to mitigate not eliminate
the burden to the defendant in dealing with the mass document dump. The same issue is presented
in the general criminal discovery context where the Government uses the open file, mass document
dump to meet its discovery and related obligations. I discuss that issue later beginning on p. 776 and
urge the reader to refer to that discussion before leaving this topic.
g.
Disclosures and the Plea Bargain Process.
These disclosures are considered essential to a fair trial. But, as we know, plea agreements
are not trials and plea agreements account for over 90% of the convictions in the federal system.
Usually plea agreement discussions start and end prior to the time disclosures are required even
1589
United States v. Ohle, 2011 U.S. Dist. LEXIS 12581 (SD NY 2011).
- 682 -
under early docket control orders. Indeed, in some cases, pleas are negotiated and settled even
before the formal charge by indictment, information or otherwise. But even where not agreed to
upon the charge, the plea process usually commences soon after and is concluded before the
Government is required to make its Brady, Giglio and Jencks Act disclosures. Many thoughtful
scholars and practitioners believe that this can put the defense at an unfair disadvantage in the plea
bargaining process. And, merely postponing the plea until the Government makes the disclosures
is not the answer to that concern because there are pressures to conclude the plea process early, even
before liberal disclosure docket control orders require the disclosures. These pressures can include
the Sentencing Guidelines acceptance of responsibility before the Government has substantially
prepared for trial (which may be the first point it recognizes the need for disclosure of some of the
materials), financial pressures on the defendant to hold down costs, etc. The defenses plea
bargaining may thus be made without the knowledge of exculpatory or impeaching information,
even that information actually known to the prosecutors bargaining from a hand that appears
stronger than it really is.1590
Of course, one can always ask the prosecutor during the plea bargaining process if he is
aware of any of this type of information and will disclose it. Some prosecutors will do that. Others
wont because they dont have to and believe that the timing requirements for a later disclosure are
fair, which means that they can conclude the plea bargaining process with or without a plea
without have to disclose. Other prosecutors just believe their own bullshit about the case, and do
not recognize any of the evidence as being exculpatory or potentially impeachable of the key
witnesses.
h.
ABA Model Rule 3.8(d)
Rule 8.3(d), ABA Model Rule of Professional Conduct 3.8(d), requires prosecutors to:
make timely disclosure to the defense of all evidence or information known to the
prosecutor that tends to negate the guilt of the accused or mitigates the offense, and,
in connection with sentencing, disclose to the defense and to the tribunal all
unprivileged mitigating information known to the prosecutor, except when the
prosecutor is relieved of this responsibility by a protective order of the tribunal.
ABA Formal Opinion 09-4541591 interprets this Rule as follows:
This ethics rule is more demanding than the constitutional rule.
1590
In United States v. Ruiz, 536 U.S. 622 (2002), the Court held that disclosure the
information such as Brady required before trial is not required before a valid plea and that, indeed,
the Government may require as a condition of the plea that the defendant waive the right to this
information. For a thoughtful criticism of Ruiz, see Barry Tarlow, Pre-Plea Brady/Giglio
Disclosures: Beware of Prosecutors Bearing Gifts, 30 Champion 60 (2006).
1591
ABA Standing Comm. on Ethics and Professional Responsibility, Formal Op. 09-454
(2009).
- 683 -
This ethics rule has no materiality limitation, and the omission of materiality was
intentional.
Even otherwise inadmissible evidence must be disclosed so long as it might lead
defense counsel to evidence.
Disclosure must be made as soon as reasonably practicable unless otherwise
allowed by protective order of the court.
Disclosure must be made prior to a guilty plea to assist defense counsel in plea
negotiations.
A defendant may not waive prosecutors obligations, nor may prosecutors even ask
for such a waiver.
Prosecutors are not affirmatively obligated to search for exculpatory information, but
must disclose what they know. Deliberate ignorance is not an excuse. (Note,
however, that the constitutional requirements as elaborated in Brady and Giglio
might require some type of search.)1592
In response to federal prosecutors claims to exemption from the state ethical and other rules,
Congress enacted 28 U.S.C. 530B (McDade Act) which provides in pertinent part:
530B. Ethical standards for attorneys for the Government
(a) An attorney for the Government shall be subject to State laws and rules, and local
Federal court rules, governing attorneys in each State where such attorney engages
in that attorney's duties, to the same extent and in the same manner as other attorneys
in that State.
(b) The Attorney General shall make and amend rules of the Department of Justice
to assure compliance with this section.1593
It is not clear that, even with this statutory requirement, federal courts are yet willing to
require federal prosecutors to meet the requirements of Model Rule 8.3(d) and to impose Brady type
1592
This list is drawn substantially from Irwin H. Schwartz, Beyond Brady: Using Model
Rule 3.8(D) in Federal Court for Discovery of Exculpatory Information, 34 Champion 34, 35 (2010);
see also Theresa A. Newman and James E. Coleman, Jr., the Prosecutor's Duty of Disclosures under
ABA Model Rule 3.8(D), 34 Champion 20 (2010).
1593
The rules indeed have been amended to provide that prosecutors comply with 530B
in criminal investigations and prosecutions. 28 C.F.R. 77.3.
- 684 -
remedies for their failure to do so.1594 Still, defense attorneys in states having such an ethical rule
should consider this argument if they face or suspect Brady-type violations.1595
i.
Remedies for Brady and Related Violations.
The remedy for violations of Brady depends upon prejudice or presumed prejudice to the
defendant. If addressed before trial or during, the remedy may be just suppression of evidence so
that the Government must prove the crime free of any benefit of the Brady violation.1596
3.
Henthorn Requests.
If an IRS employee is to be a Government witness at trial, the foregoing rules apply. One
prophylactic measure is to insure that the IRS employees personnel file has been reviewed for
potential impeachment material. The IRM refers to this request as a Henthorn request.1597 Both the
Attorney General and the Secretary of the Treasury have guidelines to insure disclosure of all Giglio
and Brady information, including appropriate personnel files and, where this may be a problem, the
Henthorn material should be disclosed and discussed in the CRL (the CRL being the referral letter
from the IRS to the DOJ Tax).1598 You might want to request these materials specifically and by also
referencing the Henthorn case and IRM provision.
Some Henthorn information (such as the lead investigators criminal activities) might be
considered Brady information that the prosecutor is required to affirmatively seek out and disclose
even in the absence of a Henthorn request.1599
F.
The Civil Case Gambit.
As I noted earlier, commencement of some type of civil case while the criminal investigation
or prosecution is ongoing is a bit dicey, because the Government may seek discovery from the
taxpayer free of the restraints of the Fifth Amendment privilege. Nevertheless, for the risk taker,
the taxpayer might want to force some type of civil case and attempt discovery of the Governments
1594
See Stephen R. Spivack, David E. Roth, and Daniel P. Golden, Troubling the
Heavens: Production of Evidence Favorable to Defendants by the United States, 34 Champion 24,
25 at n. 18 (2010) (However, it seems unlikely that a federal court would permit a defendant to
enforce a state ethical rule patterned after Model Rule 3.8(d) to compel access to exculpatory
material.)
1595
See Irwin H. Schwartz, Beyond Brady: Using Model Rule 3.8(D) in Federal
Court for Discovery of Exculpatory Information, 34 Champion 34, 35 (2010); see also Theresa A.
Newman and James E. Coleman, Jr., The Prosecutor's Duty of Disclosures under ABA Model Rule
3.8(D), 34 Champion 20 (2010).
1596
United States v. Struckman, 611 F.3d 560, 577-578 (9th Cir. 2010).
1597
United States v. Henthorn, 931 F.2d 29 (9th Cir. 1991), See IRM 9.6.3.7.1.1.
1598
LGM 199902018 (11/20/98), published at 1999 TNT 11-48 (1/19/99).
1599
See Arnold v. Secretary, Dept. Of Corrections, 595 F.3d 1324 (11th Cir. 2010).
- 685 -
case through the more liberal discovery rules in the civil case. As noted, however, the courts in the
civil cases usually stay the case pending resolution of the criminal matter.
G.
Shifting the Responsibility.
A classic defense is that the taxpayer relied on the advice of counsel or the tax practitioner
involved. This defense assumes that the taxpayer sought such assistance in good faith and made
good faith disclosures to the attorney or the tax practitioner. The defense could involve the attorney
or the tax practitioner in criminal conduct or could just create a never-never land in which neither
party is subject to criminal exposure.
If the taxpayer can deliver up the attorney or tax practitioner for prosecution, he may receive
a deal by Government agreement not to prosecute the taxpayer or to allow a lesser plea or, if
nothing else, a downward sentencing adjustment for cooperation. This potential should instruct the
practitioner to exercise caution in his or her representation. Never make the clients problems your
problems.
Even if the taxpayer sought the advice or assistance of a qualified tax practitioner and gave
him all the correct and material information, the practitioner could still have completed the return
incorrectly. That does not necessarily absolve the taxpayer of responsibility if the taxpayer knew
that the return understated his or her tax liability.1600 Nevertheless, the Government would have a
tough time proving the latter if, indeed, the taxpayer had given the practitioner the pertinent
information.
Obviously, in order to assert this defense credibly, the taxpayer will have to take the stand
and the taxpayer will have to be credible. I include the following case to show the dangers lurking
in this defense. Thus, in United States v. Stone,1601 the taxpayer, a doctor, was charged with willful
tax evasion and asserted this defense. His accountants determined his taxable income for the return
from his daily log books, monthly bank statements, canceled checks and check stubs and from
interest income recorded on savings account passbooks. On cross-examination, the taxpayer
admitted destroying these documents before the Government could check them.
The Government therefore used the net worth method to determine taxable income. The
taxpayer did not seriously question the results of that methodology. The taxpayer did argue that
he relied in good faith on his accountant and therefore there was no willfulness. The Court said:
Appellant argues further that he placed total, good faith reliance upon a
competent CPA to compute his tax returns accurately, and the deficiencies were the
result of the accountants negligence. This contention goes both to the sufficiency
of the evidence and to the attack on the Courts jury charge. The credibility of this
contention was purely a question of fact for the jury, who decided it adversely to Dr.
1600
1601
United States v. Olbres, 61 F.3d 967, 970-71 (1st Cir. 1995).

431 F.2d 1286 (5th Cir. 1970).
- 686 -
Stone. Based upon a thorough review of the record we are in accord with their
finding.
It just may be that this defense was the worst one the Doctor could have
asserted. For it established that whatever the accountants had they obtained from the
Defendant. And what he furnished turned out to be spectacularly wrong.
Mr. Weiner, Appellants accountant for over 15 years, testified that he had
computed Dr. Stones account during each of those years, including 1962-1964. He
personally made an annual visit to Dr. Stones office to obtain all of his sources of
taxable income, and relied completely upon the Doctor or his wife to supply him
with a comprehensive register of the taxable income. Mr. Weiner would then take
this material to his office where either he or his employees would compute the
Doctors returns. Once this was finished he returned both the records and his
worksheets to the Doctor. Mr. Weiner inadvertently retained possession of his
worksheets for 1962. Those worksheets reveal that Dr. Stone had reported only
$5,800.00 in taxable income for 1962. The reconstructed records show that in that
same year the Doctor made life insurance payments of $5,900.00, increased his bank
deposit nearly $25,000.00, and had personal expenditures alone of $11,000.00.
The accountants employees similarly testified that any tax returns they
computed were based upon all of the Doctors taxable income, the source of such
information being the Doctor himself. It rounds this out to state that the effort to put
the blame on others -- a tactic with built-in hazards -- was not accepted by the jury.
Courts encountering this defense in its usual context that of the accountant who is the
return preparer often say that, in order to succeed, the taxpayer must have made full disclosure to
the accountant.1602 Obviously, a taxpayer who knowingly withholds information that the accountant
needs to prepare a true and accurate return has not relied upon his accountant. But what of the
taxpayer who simply turns over his or her basic records with the expectation that the accountant will
ask such questions as appropriate? I have encountered the following situation. The taxpayer sells
assets for $1,000,000 at a formal closing where the closing agent pays the taxpayer by diverting
$900,000 to pay off certain of the taxpayers debts and cuts the taxpayer a check for $100,000 which
is deposited into the checking account for the taxpayers sole proprietorship, which reports on the
cash method. On the check records, the taxpayer simply notes that $100,000 was deposited into the
account and that the payor on the check was XYZ Title Company, which, of course, is correct. But
the records then do not show that the taxpayer sold assets or received a much larger amount. The
accountant then just compiles all of the deposits including this $100,000 amount into gross
revenue without any differentiation whatever as to the fact that it was for assets sold or picking up
the much larger amount that the cash records simply did not show. The accountant asks no
questions. In a situation like this, the taxpayer has relied upon the accountant but a taxpayer
operating in this mode will bear some risk that, as to that large a transaction, he should have put
more information in the cash records or, alternatively, specifically brought it to the accountants
1602
E.g. United States v. Bishop, 291 F.3d 1100 (9th Cir. 2002).
- 687 -
attention, which would almost certainly have flushed out the true and much larger nature of the
transaction.
There are a plethora of other cases regarding this defense and its burdens and pitfalls.1603
V.
Delay in Obtaining Information.
If the taxpayer cannot ultimately prevent the Government from obtaining information if the
Government fully asserts its power and rights, in many cases the next best thing is to delay the
Government from obtaining the information. Delay, when possible, can have several salutary
effects. First, it can perhaps cause the statute of limitations to lapse before the Government can
effectively make its case. Second, delay and other roadblocks to an effective inquiry can cause the
Government to focus its limited resources elsewhere.
We dealt earlier in the summons provisions as to some legal ways in which the taxpayer can
cause delay.
1603
E.g., United States v. Brimberry, 961 F.2d 1286, 1290 (7th Cir. 1992); United States
v. Wilson, 887 F.2d 69, 73 (5th Cir. 1989); United States v. Meyer, 808 F.2d 1304, 1306 (8th Cir.
1987); United States v. Pomponio, 563 F.2d 659, 662 (4th Cir. 1977).
- 688 -
CH. 10 - PROOF ISSUES

I.
Introduction.
In a tax evasion case, proving the tax due and owing can be a daunting task. That is why the
Government will often fall back to some charge, such as Section 7206(1) that does not require proof
that a tax is due and owing. Where the Government seeks to try the Section 7201 case, however,
it will be faced with proving beyond a reasonable doubt that a tax is due and owing (the criminal
numbers). I principally deal in this chapter with the methodologies for doing so.
These methodologies may be used at the trial in chief when guilt or innocence is determined,
but may also be used in the sentencing phase where the tax loss number is a critical component of
the guidelines calculations. So, a tax loss number or tax due and owing will be critical even if
the defendant is convicted on one or more counts that do not have a tax due and owing as an element
of the crime. The key difference in computing the tax due and owing at the trial in chief and in the
sentencing phase is the burden of proof. In the trial in chief, where tax due and owing is an element
of the crime, the Government must prove the amount beyond a reasonable doubt. In the sentencing
phase, the Government need only prove the amount by a preponderance of the evidence. Because
of these differing standards of proof and the fact that noncharged or nonconvicted periods can be
considered as relevant conduct, the Government will frequently assert a larger tax loss at sentencing
than it did at trial.
The practitioner must be prepared to struggle with tax calculations throughout the criminal
proceedings. Indeed, good practitioners attempt to quantify the amounts must earlier, at the
inception of the criminal investigation which is usually a couple of years before the actual
indictment. We turn now to methodologies for proof.
II.
Threshold Burden of Proof Issues.

A.
Presumption of Innocence and Guilt Beyond a Reasonable Doubt.
In a criminal tax prosecution, just as any other criminal prosecution, the Government bears
the burden of proving guilt beyond a reasonable doubt.1604 The Supreme Court has explained the
compelling need for this burden as follows:
The reasonable-doubt standard plays a vital role in the American scheme of
criminal procedure. It is a prime instrument for reducing the risk of convictions
resting on factual error. The standard provides concrete substance for the
presumption of innocence -- that bedrock axiomatic and elementary principle
whose enforcement lies at the foundation of the administration of our criminal law.
. . . [A] person accused of a crime . . . would be at a severe disadvantage, a
disadvantage amounting to a lack of fundamental fairness, if he could be adjudged
1604
In re Winship, 397 U.S. 358, 364 (1970).
- 689 -
guilty and imprisoned for years on the strength of the same evidence as would suffice
in a civil case.1605
The Court then held that we explicitly hold that the Due Process Clause protects the accused
against conviction except upon proof beyond a reasonable doubt of every fact necessary to constitute
the crime with which he is charged.1606
Courts and commentators have noted the utilitarian function of burdens of persuasion to a
civilized society such as we imagine ours to be. In criminal cases, societally, it is oft stated that it
is better to acquit a guilty person than convict an innocent one; Blackstone even stated that it is
better to acquit 10 guilty persons than convict one innocent one.1607 But, even in this simple
perhaps simplistic construct for analysis, can or are we willing to say that it is better to acquit 100
guilty persons than convict one innocent person? And, when we layer on the fact that different major
crimes present different risks to the community, can the equation of the risks of conviction of the
innocent be assessed differently in different cases and contexts? Specifically, for example, while
we might be able to let 10 or even 100 tax evaders go free rather than convict one innocent person
of tax evasion, would we want the same odds to apply to persons accused of terrorism? You see
where I am going, since we are never going to have a standard requiring certainty whatever that
is we are necessarily going to have a standard that allows the innocent to be convicted. So, what
do we give jurors the usual guilt or innocent finders in criminal cases to help them keep the risk
of conviction of innocent persons to an acceptable level? We give them an elusive one-size fits all
instruction on the meaning of beyond a reasonable doubt to which I now turn.1608
1605
In re Winship, 397 U.S. 358, 363 (1970).

In re Winship, p. 364.
1607
Dan Simon, A Third View of the Black Box: Cognitive Coherence in Legal Decision
Making, 71 U.Chi. L. Rev. 511, 572 n. 214 (2004), citing Blackstones Commentaries at 358. In
a similar vein, Simons notes that [a]ccording to decision theory, a ratio of nine false acquittals to
one false conviction should lead to a standard of proof of about 90 percent. Id. p. 572 n. 215 (2004)
(citing Francis C. Dane, In Search of Reasonable Doubt: A Systematic Examination of Selected
Quantification Approaches, 9 L & Human Behav 141, 154-56 (1985).
1608
See generally Erik Lillquist, Recasting Reasonable Doubt: Decision Theory and the
Virtues of Variability, 36 U.C. Davis L. Rev. 85 (2002), arguing that, although articulated in the
same terms in all major criminal cases, in real-word jury application, the standard is flexible,
permitting a lower level of proof to convict in cases involving crimes that place the community at
higher risk. Professor Lillquists assertion recognizes that, given the indefiniteness in the one-size
fits all standard, in practice juries assess and balance utilities and disutilities associated with errors
and thus reaching differing levels of certainty in different cases. He asserts (p. 62) that this:
draws on the insight that no agreement can be reached concerning the proper
normative value for the reasonable doubt standard. The law appropriately leaves the
amount of certainty unstated, so that the jurors can make the final decision on the
proper level. This is because the optimal level of certainty in any particular case is
both crime-and defendant-specific -- some particular types of crime and some
particular defendants might optimally require very high levels of certainty, while
1606
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There is no universally accepted instruction to the jury defining reasonable doubt. Some
courts and commentators urge that the bare words beyond a reasonable doubt should be used
with no attempt to further define the term.1609 Other offerings of instructions provide more words,
if perhaps uncertain guidance and clarity; indeed, dare I say it, there is even reasonable doubt about
precisely what reasonable doubt is. Some perhaps would argue that this is a good state of affairs,
for it permits the jury in its collective wisdom to shape the fact finding process to its perception of
the needs of the community and the individual charges and defendant.1610 Still, because jury charges
are so important in the process of a criminal trial, I offer a sampling of instructions to the jury.
A leading and oft quoted form book offers the following to assist the jury in applying the
reasonable doubt standard:
The question naturally is what is a reasonable doubt. The words almost define
themselves. It is a doubt based upon reason and common sense. It is a doubt that a
reasonable person has after carefully weighing all of the evidence. It is a doubt which
would cause a reasonable person to hesitate to act in a matter of importance in his or
her personal life. Proof beyond a reasonable doubt must ... be proof of such a
convincing character that a reasonable person would not hesitate to rely and act upon
it in the most important of his own affairs.1611
other crimes and defendants might optimally require much lower levels of certainty.
The use of a flexible standard allows the decision maker to apply the level of
certainty that is most appropriate to a particular case.
1609
See Lawrence Solan, Refocusing the Burden of Proof in Criminal Cases: Some Doubt
about Reasonable Doubt, 78 Tex L Rev 105, 105-106, particularly n. 3 (1999). United States v.
Oriakhi, 57 F.3d 1290, 1300 (4th Cir. 1995) (It is well settled in this circuit that a district court
should not attempt to define the term reasonable doubt in a jury instruction absent a specific
request for such a definition from the jury.).
1610
See Erik Lillquist, Recasting Reasonable Doubt: Decision Theory and the Virtues of
Variability, 36 U.C. Davis L. Rev. 85 (2002); see Michael S. Pardo, Second-Order Proof Rules, 61
Fla. L. Rev. 1083, 1095 (2009) (stating that the purported rationale for saying less about reasonable
doubt is that jurors already understand the notion.)
1611
1 Leonard B. Sand et al., Modern Federal Jury Instructions, Instr. 4-2, at p. 4-8
(2002), quoted in Erik Lillquist, Recasting Reasonable Doubt: Decision Theory and the Virtues of
Variability, 36 U.C. Davis L. Rev. 85, 87 (2002). The text of this instruction echoes the comment
the Supreme Court made in Holland v. United States, 348 U.S. 121, 140 (1954) (case citation
omitted):
Even more insistent is the petitioners attack, not made below, on the charge of the
trial judge as to reasonable doubt. He defined it as the kind of doubt . . . which you
folks in the more serious and important affairs of your own lives might be willing to
act upon. We think this section of the charge should have been in terms of the kind
of doubt that would make a person hesitate to act, rather than the kind on which he
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In 1988, the Federal Judicial Center offered the following instruction:

As I have said many times, the government has the burden of proving the
defendant guilty beyond a reasonable doubt. Some of you may have served as jurors
in civil cases, where you were told that it is only necessary to prove that a fact is
more likely true than not true. In criminal cases, the government's proof must be
more powerful than that. It must be beyond a reasonable doubt.
Proof beyond a reasonable doubt is proof that leaves you firmly convinced
of the defendant's guilt. There are very few things in this world that we know with
absolute certainty, and in criminal cases the law does not require proof that
overcomes every possible doubt. If, based on your consideration of the evidence,
you are firmly convinced that the defendant is guilty of the crime charged, you must
find him guilty. If on the other hand, you think there is a real possibility that he is not
guilty, you must give him the benefit of the doubt and find him not guilty.
The Fifth Circuits pattern jury instructions adds to the mix the presumption of innocence:
1.05 PRESUMPTION OF INNOCENCE, BURDEN OF PROOF, REASONABLE
DOUBT
The indictment or formal charge against a defendant is not evidence of guilt.
Indeed, the defendant is presumed by the law to be innocent. The law does not
require a defendant to prove his innocence or produce any evidence at all [and no
inference whatever may be drawn from the election of a defendant not to testify].
The government has the burden of proving the defendant guilty beyond a reasonable
doubt, and if it fails to do so, you must acquit the defendant.
While the government's burden of proof is a strict or heavy burden, it is not
necessary that the defendant's guilt be proved beyond all possible doubt. It is only
required that the government's proof exclude any reasonable doubt concerning the
defendant's guilt.
A reasonable doubt is a doubt based upon reason and common sense after
careful and impartial consideration of all the evidence in the case. Proof beyond a
reasonable doubt, therefore, is proof of such a convincing character that you would
be willing to rely and act upon it without hesitation in the most important of your
own affairs.
Note
Delete bracketed material if defendant testifies.
would be willing to act.
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Trial lawyers love to describe burdens in percentage terms. In the ordinary civil case, the
party bearing the burden of persuasion must prove by a preponderance of the evidence which is
quantified as evidence which the trier assesses as proving the key fact to be more likely than not
i.e., in excess of 50%. Now, if you were going to state the percentage for beyond a reasonable
doubt, what would it be? One author states the inquiry as follows:
Consider what proof beyond a reasonable doubt actually mandates that the
jury do. Surely it requires more proof than the preponderance of the evidence
standard, which governs in civil cases. As commonly explained to civil juries, the
preponderance standard is quantified as any amount of certainty greater than 50%,
and proof beyond a reasonable doubt must mean more than that. But how much
more proof than a preponderance is needed in a criminal case? The quantity of
certainty is never quantified; instead, it is kept quite vague. Is 90% certainty
required? 95%? 99%? Or could the amount of certainty be much lower, say perhaps
75%?1612
Indeed, whatever the percentage level of certainty imagined to be inherent in the standard, it is
reported that research has consistently shown that the jurors in criminal cases will often be satisfied
with much less certainty than is conventionally assumed.1613
Consider again the following from Judge Posner:
Judges, when asked to express proof beyond a reasonable doubt as a
probability of guilt, generally pick a number between .75 and .90 (depending on the
judge), and jury quantifications are similar. These may seem shockingly low figures,
implying that as many as a quarter of the people convicted of crime are innocent. 1614
Judge Posner notes that prosecutorial selectivity in picking cases to prosecute substantially mitigates
the risk that the innocent will be convicted. Still, assuming that there were no prosecutorial
selectivity mitigating factors, are you concerned that judges and jurors in 20 or 25% doubt could
return a verdict of guilty in a criminal case?1615
1612
Lillquist, supra, p. 86.

Lillquist, p. 88; see also
1614
Richard Posner, supra, p.1506. See Dan Simon, A Third View of the Black Box:
Cognitive Coherence in Legal Decision Making, 71 U.Chi. L. Rev. 511, 557 n. 147 (2004)
(Empirical [r]esearch that monitors perceptions of the standard reveals that while assessments vary
with the methodology of elicitation, the responses tend to converge in the range of 80 to 90 percent
certainty satisfying the standard. citing Reid Hastie, Algebraic Models of Juror Decision Processes,
in Reid Hastie, ed, Inside the Juror: The Psychology of Juror Decision Making 84, 102 (Cambridge
1993)).
1615
For a good discussion of the difficulty of making the reasonable doubt concept
meaningful to juries, see Thomas Lundy, Comparison of Standards: A Strategy for Explaining Proof
Beyond a Reasonable Doubt, 27 Champion 61 (2003).
1613
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Judge Posners conclusions are his own, based on his experience and his anecdotal polling
of his colleagues. Other attempts at empirical studies of these issues show that judges and suggest
that jurors are all over the lot on the issue. In one study of his 10 of his colleagues by Judge
Weinstein of the Eastern District of New York, one gave a probability of 76%, one gave 80%, four
gave 85%, two gave 90%, and one gave 95%. In other words, the probabilities hovered around
85%-90%.1616 In a larger survey of federal judges throughout the country:
Of the 171 judges who responded, 126 had thresholds that were 90% or higher.
Eleven judges had thresholds of 75% or below, one of whom was satisfied with a
50% probability. The other study was conducted among Illinois state court judges.
On a scale of 1 to 10, the mean level of certainty in this study was 8.9, with a median
of 8.8; 63% of the judges responded with a level of 9.0 or higher. Most (but not all)
judges, then, tend to see the government's burden much the way Blackstone did
[about 90%].1617
Of course, I noted above1618 that there are unique prosecutorial mitigating factors in tax cases
that virtually require that the Government only choose cases to prosecute where the evidence in all
except the atypical case will produce a conviction. This further mitigates the possibility of
conviction of the innocent in tax cases . Moreover, in applying whatever the juries perceive the
standard to be (whether it is 80% or 90% or some other number), in tax cases one can argue that a
1616
Solan, pp. 126-127.

Solan, p. 127. In this regard, Judge Jack B. Weinstein, certainly one of the deeper
thinkers in this area, has noted that the lesser clear and convincing standard of proof (the standard
applicable in civil fraud matters such as a civil fraud penalty under 6663) might be quantified as
proof above 70% and a more stringent civil standard clear, unequivocal and convincing as proof
above 80%. See United States v. Copeland, 379 F. Supp. 2d 275 (ED NY 2005), affd United States
v. Copeland, 2007 U.S. App. LEXIS 19794 (2d Cir. 2007), quoting United States v. Fatico, 458 F.
Supp. 388, 411 (E.D.N.Y. 1978). If, indeed these are the right calibrations for these two burdens
conceptualized as lesser than beyond a reasonable doubt, then one can infer that the beyond a
reasonable doubt standard is significantly higher than 80% say 90%. Indeed, one prominent
scholar conceptualizes the beyond a reasonable doubt standard at 95%. See also Lewis Kaplow,
Burden of Proof, 738, 779 n. 78 (2012) (citing surveys of federal judges showing a ranges of 80%
to 95%,with an average of 86% and 90%); and Michael S. Pardo, Second-Order Proof Rules, 61 Fla.
L. Rev. 1083, 1095-1096 (2009) (There does not appear to be any stable, intuitive understanding
of BARD shared by juries, or by judges: for example, jurors and mock jurors have quantified the
government's burden at around 61%, have interpreted BARD to be less demanding than the
clear-and-convincing-evidence rule, and have expressed the idea that once there is some evidence
of guilt the defendant must persuade the jury of his innocence.) . For making this meaningful to
a jury, see Thomas Lundy, Comparison of Standards: A Strategy for Explaining Proof Beyond a
Reasonable Doubt, 27 Champion 61 (2003).
1618
1617
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jury will be more like to hold the Government to the burden more stringently than it might for some
other type of case (e.g. a terrorist case).1619
B.
Shifting Burden?
In classic theory, that burden to prove beyond a reasonable doubt each element of the crime
charged is on the Government from the beginning of the trial until guilt or innocence is determined.
We will see, however, some instances in which the net effect of the Governments case is so strong
that it does not have to prove the negative of propositions that are really essential to its case, unless
and until the defendant puts the issue in play. Lets use a simple example, if the Government can
prove that the taxpayer omitted $100,000 of interest income from his return, does that prove beyond
a reasonable doubt that the taxpayer owed tax on an additional $100,000 of income and thus
committed tax evasion? Not necessarily, for the taxpayer could have had unreported expenses,
perhaps even directly related to the omitted income, that either totally offset the omitted income or
offset it enough that the resulting tax is not material and thus unable to sustain a tax evasion charge.
In Siravo v. United States,1620 the taxpayer argued that, based on the type of business
operations involved, the omitted business income in the magnitude asserted by the Government
would have required employees other than the taxpayer and there would have been associated labor
expenses. The taxpayer urged, in essence, that the Government must prove that the omitted income
was not offset by associated expenses. The court rejected the argument, holding that . . . [t]he
applicable rule here is that uniformly applied in tax evasion cases -- that evidence of unexplained
receipts shifts to the taxpayer the burden of coming forward with evidence as to the amount of
offsetting expenses, if any. Id. at 473 (citations omitted). The coming forward language is trial
jargon to mean that a production burden was shifted to the defendant. Logically, had the defendant
met that production burden (a lesser burden than a persuasion burden however formulated (i.e., more
likely than not or beyond a reasonable doubt)).
Consider also United States v. Tarwater,1621 where the defendant, an accountant for a
hospital, received payments that the hospital thought were being passed by the defendant to a third
party (Davis) it thought was providing services to the hospital. Of course, if the defendant were
merely a conduit to pass the monies from the hospital, the payments in question would not be his
income and the defendant would not need to include the payments anywhere on his returns. Upon
investigation, however, the IRS found some evidence that the defendant was keeping the bulk of the
money and using it for his personal purposes, rather than passing it on to Davis. The defendant was
then indicted for tax perjury, 7206(1), for filing returns that omitted the portion that the
Governments investigation determined the defendant kept for himself. At trial, the Government
clearly met its burden of showing that that taxpayer received the payments from the hospital and
deposited them into various accounts belonging to defendant. The evidence was arguably equivocal
1619
This is my surmise on the subject, drawn from my understanding and agreement with
Judge Lilquists argument.
1620
377 F.2d 469 (1st Cir. 1967).
1621
308 F.3d 494 (6th Cir. 2002).
- 695 -
as to whether the defendant had passed equal amounts on to Davis, in which case, as noted, it would
not be the defendants income and his failure to include any of the payments in income was entirely
proper. The Governments bank deposit analysis suggested that he did not pass most of the money
on to Davis, but that was only circumstantial evidence. Since neither party called Davis to testify
as to whether he received the payments in question and defendant did not testify, the Government
clearly did not directly establish that the entire amounts had not been paid Davis, thus being income
to defendant to the extent not paid to Davis. Over defendants objection, the trial court gave the
following instruction to the jury:
While the government has the burden to prove beyond a reasonable doubt
that the defendant understated the amount of gross receipts or total income reported
on his 1992 Federal Income Tax Return and the amount of his total income reported
on his 1993 and 1994 Federal Income Tax Returns, the government is not required
to prove the non-existence of alleged payments by [Tarwater] to or on behalf of Mr.
Davis.
On appeal, the defendant challenged the instruction as impermissibly relieving the Government of
a burden it bore in order to prove an essential element to prove that the defendant had income ab
initio that must be reported on the return.
The Court of Appeals rejected the argument. The Courts reasoning based on authority it
deemed analogous was that, in situations like this, the Government cannot be assigned a burden to
prove a negative that Davis did not receive the amounts in issue. In such cases, the Court says that
the party having unexplained receipts has the burden of at least coming forward (i.e., a production
burden) with some evidence that Davis did receive the money. 1622
Does this holding seem proper to you? If it strikes you as wrong, you are in good company.
The dissenting judge reasoned:
The instruction at issue had the effect of negating the governments burden
to [that the defendant had income that was required to be shown on the return]. * *
* * Tarwater contends, and the testimony of an IRS agent confirms, that: (1) the
payments from Jefferson Memorial Hospital (JMH) were income reportable either
to Tarwater or Davis, but not both; and (2) if Tarwater passed through to Davis the
payments by JMH for Davis, those payments were not income to Tarwater. Thus,
if the payments were passed through, Tarwater did not knowingly file materially
1622
The Court of Appeals also rejected defendants argument that the judge
impermissibly denied a requested jury instruction that income that a taxpayer, acting as a conduit,
receives from a party for whom services are provided and passes on to the party providing the
services, does not have income from money received and passed on. That is a correct proposition
of law and was relevant to the case at hand. The Court brushed past defendants argument on the
basis that it was within the trial judges discretion as to whether to give such an instruction that was
so critical to the defendants defense.
- 696 -
incorrect or illegal tax returns. In a similar situation, where the characterization of

an increase in wealth as income was disputed, we held that, [i]f the money were
truly a loan, [the defendant] would have been under no duty to report it as income,
and he would not be guilty of the predicate offense of filing a false tax return.
[Citation omitted]. Because the existence of Tarwaters alleged payments to Davis
was a fact necessary to establish whether Tarwater knowingly submitted false returns
for 1992, 1993, and 1994, the government was required to prove beyond a reasonable
doubt that he did not pass through to Davis payments by JMH for Davis.
In other words, the government was required to prove beyond a reasonable
doubt that the payments by JMH were income to Tarwater. If the payments by JMH
were for Davis and were passed through Tarwater to Davis, however, they were not
income to Tarwater. The majority suggests that Tarwaters payments to Davis are
analogous to offsetting expenses, relying on cases stating that the government need
not come forward with evidence negating all possible offsetting expenses and
nontaxable gains to make a case that a taxpayer failed to report his gross income. In
the instant case, however, Tarwater does not argue that the government should have
a burden to produce this evidence. Rather, in claiming that the jury instruction
shifted the governments burden of proof, Tarwater rightly asserts that the
government had a burden to show that the only alleged source of income in this case
-- payments from JMH -- actually constituted income to Tarwater. By concluding
that the government does not have this burden, the majority improperly extends the
law of other circuits to suggest that the government is not only excused from
producing evidence to negate all possible offsetting expenses or nontaxable gains,
but that the government is further excused from proving beyond a reasonable doubt
that a defendant received income that he knowingly failed to report. Therefore, the
jury instruction at issue impermissibly shifted the burden of proof from the
government to the taxpayer.
We will see other instances of this phenomenon below. For example, we will see that in a
net worth case in which the Government must prove opening net worth, the Governments proof
does not require that it establish beyond a reasonable doubt that the taxpayer did not have a secret
cash hoard at the beginning of the period. If the taxpayer actually had a cash hoard not accounted
for in the Governments increase in net worth calculations, the Governments calculations would
overstate income. As we will see, in this type of case, all the Government must show is that it made
all reasonable attempts to discover the taxpayers correct opening net worth. If the taxpayer desires
to mount a cash hoard defense, the taxpayer will bear some production burden to put that issue in
play. Then, the case will be submitted to the jury with appropriate instructions that, if it finds that
the taxpayer indeed had a cash hoard that the Government did not account for and the amount is
sufficient, under the facts, to account for the increase in income in the Governments calculations,
then the jury can find the defendant not guilty. The Court will also say that the Government has the
burden of proving guilty beyond a reasonable doubt and, assuming cash hoard is reasonably put in
play by the taxpayers evidence, logic would tell us that the Government would have to prove the
- 697 -
non-existence of a cash hoard beyond a reasonable doubt. The courts have not gone that far
explicitly and seem to assume that, as to the existence of the cash hoard, the taxpayer really bears
that burden of proof -- at least in the sense that, if the taxpayers evidence as to the cash hoard is not
sufficient to plant a reasonable doubt in the jurys mind, he loses.
This genre of issues have to do with real life experience and probabilities. There are
defenses that a defendant is uniquely situated to prove; to impose upon the Government the
obligation to negate all such defenses beyond a reasonable doubt would bring the criminal justice
system to a halt. Nevertheless, as you can see this burden shifting in trial does raise some
conceptual problems with the notion that the Government must prove guilt beyond a reasonable
doubt by forcing the defendant to actually mount defenses that go to the heart of the elements of the
crime and put them in play and then lose even if the proof at trial does not show that the defense was
negated beyond a reasonable doubt. Because this is particularly a problem in the circumstantial
evidence cases, you will see that the Supreme Court has required the Government to go extra miles
in mounting its case if the defendant has previously supplied to the Government leads as to
defenses it might have to the Governments charges. In those cases, the Government is required to
prove that it took reasonable investigative steps to investigate those leads and was still unable to
determine whether the leads negated the existence of the element that the Government is required
to prove beyond a reasonable doubt.
III.
Direct or Specific Items Method.
The income tax is a tax due on net taxable income for the year. There are a host of
components of income, deduction and sometimes credit that enter the bottom-line determination of
tax due. Criminal trials rarely deal with direct proof of each item of income, deduction and credit.
Usually, the starting point or base line will be the taxpayers return as filed. The return will
be deemed the taxpayers admission as to the items included on the return, at least as to the items
that the Government does not question.1623 Then the Government will contest deductions or credits
or assert additional specific items of income, calculate the income as thus adjusted, apply the
appropriate rate and that is the tax due and owing for criminal purposes. In this drill, the
1623
United States v. Burkhart, 501 F.2d 993, 995 (6th Cir. 1974), cert. denied, 420 U.S.
946 (1975); see Warszower v. United States, 312 U.S. 342, 347 (1941). Take the following case,
if the taxpayer reported receipt of $100,000 from source X on the original return and, in the ensuing
evasion case, the Government claims the tax due and owing arises from some item of omitted
income. The Government is not required in its case in chief to prove up the $100,000 from source
X in order to correctly determine the tax due and owing. Rather, it will prove up the return and the
uncontested items on the return will be deemed the taxpayers admissions that will then permit the
tax due and owing to be determined on the basis of the return as corrected for adjustments the
Government does contest. Of course, given the fact that the Government must still prove a tax due
and owing, the taxpayer can put the issue of whether he received that $100,000 from source X by
meeting some production burden. In this sense, the dynamics would be the same as the use of
unclaimed deductions to eliminate the element of tax due and owing.
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Government will assert only the items that, given the circumstances of the case, it can establish
evasion beyond a reasonable doubt. (Please remember that, in the sentencing phase, the Government
may come forward with additional numbers it may be able to prove by a preponderance of the
evidence; the methods of proof that we discuss may be the same, however.) The Government may
be aware of other items that will affect the final civil tax bill, but which are insufficient to indicate
evasion and therefore they are omitted from the criminal calculations.
Sometimes where the specific items case is for omitted income, the proof of omitted income
may appear less certain and the Government may buttress the specific items proof with proof from
one of the indirect methods I discuss below.1624
IV.
Indirect Methods.
A.
Introduction.
In many cases, the Government may not be able to assemble proof of a tax due and owing
from direct methods of proof. In those cases, the Government has developed indirect methodologies
that circumstantially prove tax due and owing. The key cases blessing these indirect methodologies
have arisen in the guilt determination phase in tax evasion cases where tax due and owing is an
element of the offense or in parallel civil cases. These methodologies are used also in the sentencing
phase, although I am aware of no important case opinions arising from sentencing phase
determinations.
All indirect methodologies are based on logic from the facts proven can the further
inference be made that there is a tax due and owing. It is the force of that logic and that force
alone that permits the use of these methods. And, for conviction, the force of the logic must
persuade beyond a reasonable doubt.
For use of an indirect method, the Government should establish that a direct method is either
not available or not reliable under the circumstances. For example, the Government should show
why the taxpayers books and records are not available (taxpayer lost or destroyed them) or, if
available, are not reliable (substantial provable irregularities). The indirect methodology itself may
be sufficient to show that -- for example, large cash flows not reflected on the books and records
establishes that they are unreliable. The Government must also establish either a likely source for
the unreported income or that it has reasonably negated nontaxable sources of income.1625
1624
United States v. Moore, 2012 U.S. App. LEXIS 24621 (4th Cir. 2012) (unpublished).
Moore was a 7206(1) prosecution. The Court noted [t]he specific-items evidence did not account
for all of Moore's alleged unreported income, but it did not need to; to convict Moore, the jury
needed to find only that Moore willfully understated the Club's gross receipts by some material
amount.
1625
United States v. Caswell, 825 F.2d 1228, 1231 (8th Cir. 1987); see also United States
v. Marshall, 557 F.2d 527, 529 (5th Cir. 1977) (Government must prove directly or inferentially,
that the expenditures were made from taxable income).
- 699 -
Finally, I provide here only a summary of the principal indirect methods. These methods
which are heavily fact dependent can be complex in their application. A good and substantially
more detailed discussion of these indirect methods is contained in the CTM.
B.
Indirect Methods.
1.
Net Worth Method.

a.
General.
The net worth method assumes income from unexplained increases in net worth over a given
time frame usually several years. The following is a good textual explanation of the formula and
its logic:
The Government makes out a prima facie case under the net worth method
of proof if it establishes the defendants opening net worth (computed as assets at
cost basis less liabilities) with reasonable certainty and then shows increases in his
net worth for each year in question which, added to his nondeductible expenditures
and excluding his known nontaxable receipts for the year, exceed his reported
taxable income by a substantial amount. The jury may infer that the defendants
excess net worth increases represent unreported taxable income if the Government
either shows a likely source, or negates all possible nontaxable sources.
[T]he jury may further infer willfulness from the fact of underreporting coupled with
evidence of conduct by the defendant tending to mislead or conceal.1626
Note that, under this statement, the Government merely makes out a prima facie case -- one that the
jury, based on all the evidence, may accept but need not accept.
A more mechanical statement of the method is as follows:
The government established its case through the net worth approach, a method of
circumstantial proof which basically consists of five steps: (1) calculation of net
worth at the end of a taxable year, (2) subtraction of net worth at the beginning of the
same taxable year, (3) addition of non-deductible expenditures for personal,
including living, expenditures, (4) subtraction of receipts from income sources that
are non-taxable, and (5) comparison of the resultant figure with the amount of
taxable income reported by the taxpayer to determine the amount, if any, of
underreporting.1627
1626
1627
United States v. Sorrentino, 726 F.2d 876, 879-80 (1st Cir. 1984) (citations omitted).
United States v. Schafer, 580 F.2d 774, 775 (5th Cir.), cert. denied, 439 U.S. 970
(1978).
- 700 -
The formula is a logical one, that really is a bit more sophisticated than a mere change in net
worth. This is also a standard formulation:
Increase in net worth over the period
Plus nondeductible expenditures
Less nontaxable receipts
Less exemptions
Yields taxable income
Lets use a simple example using a 2 year time frame and simple figures to illustrate the
methodology:
Net worth Dec. 31 of year 2:
Less: Net worth Jan. 1 of year 1:
Increase in net worth:
Plus nondeductible expenditures (living)
Less nontaxable receipt - gift
Less exemptions (2 years)
Yields Taxable Income
Less Taxable Income as Reported
Unreported Taxable Income
$50,000
(10,000)
40,000
50,000
(10,000)
(6,000)
$77,000
(20,000)
$57,000
In this example, I added a complicating factor. The formula clearly shows that, over the two
year period, the taxpayer had substantial unreported income. But, the Government must be able to
attribute a material amount of tax to each year it chooses to charge. Depending upon the facts, this
might be quite difficult. Perhaps the Government could urge that, without some explanation from
the taxpayer, the taxable income can be allocated ratably over the number of years involved (here
two years, so 50% to each year). Depending upon the facts, the court might accept that argument,
but it might not also. But the facts might also negate that type of mechanical allocation, in which
case the Government must find some rational allocation based on the facts.
Note also that logically net worth must be computed for noncash assets at cost basis. As you
know, if a taxpayer has appreciation in value of an asset before a realizable event -- such as sale
of the asset -- the taxpayer does not have income. Thus, in the above example where the taxpayer
had apparently $57,000 of unreported income, if that entire amount were attributable to the fact that
an unsold asset had risen in value by $57,000 during the year, the increase in net worth would not
prove any additional taxable income. Just as gifts received are not taxable income, so unrealized
appreciation is not taxable income. The logic of the net worth method must be rigorously applied.
The net worth method is fraught with other dangers, as the Supreme Court noted in the
leading case of Holland v. United States.1628 Because of these dangers, the net worth method must
1628
348 U.S. 121 (1954); see also the companion case of Friedberg v. United States, 328
U.S. 142 (1954).
- 701 -
be prepared by the Government painstakingly, at great expense and effort. For this reason, net worth
cases are uncommon because in most cases where the method might be used, there may be a more
directly provable tax crime which, under the sentencing guidelines, is likely to attract the same
punishment.
The following from Holland discusses some of the larger issues raised by the method:
Before proceeding with a discussion of these cases, we believe it important
to outline the general problems implicit in this type of litigation. In this
consideration we assume, as we must in view of its widespread use, that the
Government deems the net worth method useful in the enforcement of the criminal
sanctions of our income tax laws. Nevertheless, careful study indicates that it is so
fraught with danger for the innocent that the courts must closely scrutinize its use.
One basic assumption in establishing guilt by this method is that most assets
derive from a taxable source, and that when this is not true the taxpayer is in a
position to explain the discrepancy. The application of such an assumption raises
serious legal problems in the administration of the criminal law. Unlike civil actions
for the recovery of deficiencies, where the determinations of the Commissioner have
prima facie validity, the prosecution must always prove the criminal charge beyond
a reasonable doubt. This has led many of our courts to be disturbed by the use of the
net worth method, particularly in its scope and the latitude which it allows
prosecutors. * * * *
But the net worth method has not grown up overnight. It was first utilized
in such cases as Capone v. United States, 51 F.2d 609 (1931) and Guzik v. United
States, 54 F.2d 618 (1931), to corroborate direct proof of specific unreported income.
In United States v. Johnson, supra, this Court approved of its use to support the
inference that the taxpayer, owner of a vast and elaborately concealed network of
gambling houses upon which he declared no income, had indeed received unreported
income in a substantial amount. It was a potent weapon in establishing taxable
income from undisclosed sources when all other efforts failed. Since the Johnson
case, however, its horizons have been widened until now it is used in run-of-the-mine
cases, regardless of the amount of tax deficiency involved. In each of the four cases
decided today the allegedly unreported income comes from the same disclosed
sources as produced the taxpayers reported income and in none is the tax deficiency
anything like the deficiencies in Johnson, Capone or Guzik. The net worth method,
it seems, has evolved from the final volley to the first shot in the Governments battle
for revenue, and its use in the ordinary income-bracket cases greatly increases the
chances for error. This leads us to point out the dangers that must be consciously
kept in mind in order to assure adequate appraisal of the specific facts in individual
cases.
- 702 -
1. Among the defenses often asserted is the taxpayers claim that the net
worth increase shown by the Governments statement is in reality not an increase at
all because of the existence of substantial cash on hand at the starting point. This
favorite defense asserts that the cache is made up of many years savings which for
various reasons were hidden and not expended until the prosecution period.
Obviously, the Government has great difficulty in refuting such a contention.
However, taxpayers too encounter many obstacles in convincing the jury of the
existence of such hoards. This is particularly so when the emergence of the hidden
savings also uncovers a fraud on the taxpayers creditors.
In this connection, the taxpayer frequently gives leads to the Government
agents indicating the specific sources from which his cash on hand has come, such
as prior earnings, stock transactions, real estate profits, inheritances, gifts, etc.
Sometimes these leads point back to old transactions far removed from the
prosecution period. Were the Government required to run down all such leads it
would face grave investigative difficulties; still its failure to do so might jeopardize
the position of the taxpayer.
2. As we have said, the method requires assumptions, among which is the
equation of unexplained increases in net worth with unreported taxable income.
Obviously such an assumption has many weaknesses. It may be that gifts,
inheritances, loans and the like account for the newly acquired wealth. There is great
danger that the jury may assume that once the Government has established the
figures in its net worth computations, the crime of tax evasion automatically follows.
The possibility of this increases where the jury, without guarding instructions, is
allowed to take into the jury room the various charts summarizing the computations;
bare figures have a way of acquiring an existence of their own, independent of the
evidence which gave rise to them.
3. Although it may sound fair to say that the taxpayer can explain the bulge
in his net worth, he may be entirely honest and yet unable to recount his financial
history. In addition, such a rule would tend to shift the burden of proof. Were the
taxpayer compelled to come forward with evidence, he might risk lending support
to the Governments case by showing loose business methods or losing the jury
through his apparent evasiveness. Of course, in other criminal prosecutions juries
may disbelieve and convict the innocent. But the courts must minimize this danger.
4. When there are no books and records, willfulness may be inferred by the
jury from that fact coupled with proof of an understatement of income. But when the
Government uses the net worth method, and the books and records of the taxpayer
appear correct on their face, an inference of willfulness from net worth increases
alone might be unjustified, especially where the circumstances surrounding the
deficiency are as consistent with innocent mistake as with willful violation. On the
- 703 -
other hand, the very failure of the books to disclose a proved deficiency might
indicate deliberate falsification.
5. In many cases of this type, the prosecution relies on the taxpayers
statements, made to revenue agents in the course of their investigation, to establish
vital links in the Governments proof. But when a revenue agent confronts the
taxpayer with an apparent deficiency, the latter may be more concerned with a quick
settlement than an honest search for the truth. Moreover, the prosecution may pick
and choose from the taxpayers statement, relying on the favorable portion and
throwing aside that which does not bolster its position. The problem of
corroboration, dealt with in the companion cases of Smith v. United States, post, p.
147, and United States v. Calderon, post, p. 160, therefore becomes crucial.
6. The statute defines the offense here involved by individual years. While
the Government may be able to prove with reasonable accuracy an increase in net
worth over a period of years, it often has great difficulty in relating that income
sufficiently to any specific prosecution year. While a steadily increasing net worth
may justify an inference of additional earnings, unless that increase can be
reasonably allocated to the appropriate tax year the taxpayer may be convicted on
counts of which he is innocent. While we cannot say that these pitfalls inherent in
the net worth method foreclose its use, they do require the exercise of great care and
restraint. The complexity of the problem is such that it cannot be met merely by the
application of general rules. Cf. Universal Camera Corp. v. Labor Board, 340 U.S.
474, 489. Trial courts should approach these cases in the full realization that the
taxpayer may be ensnared in a system which, though difficult for the prosecution to
utilize, is equally hard for the defendant to refute. Charges should be especially
clear, including, in addition to the formal instructions, a summary of the nature of
the net worth method, the assumptions on which it rests, and the inferences available
both for and against the accused. Appellate courts should review the cases, bearing
constantly in mind the difficulties that arise when circumstantial evidence as to guilt
is the chief weapon of a method that is itself only an approximation.
****
The Burden of Proof Remains on the Government. Nor does this rule shift
the burden of proof. The Government must still prove every element of the offense
beyond a reasonable doubt though not to a mathematical certainty. The settled
standards of the criminal law are applicable to net worth cases just as to prosecutions
for other crimes. Once the Government has established its case, the defendant
remains quiet at his peril. Cf. Yee Hem v. United States, 268 U.S. 178, 185. The
practical disadvantages to the taxpayer are lessened by the pressures on the
Government to check and negate relevant leads.
- 704 -
****
Circumstantial evidence in this respect is intrinsically no different from
testimonial evidence. Admittedly, circumstantial evidence may in some cases point
to a wholly incorrect result. Yet this is equally true of testimonial evidence. In both
instances, a jury is asked to weigh the chances that the evidence correctly points to
guilt against the possibility of inaccuracy or ambiguous inference. In both, the jury
must use its experience with people and events in weighing the probabilities. If the
jury is convinced beyond a reasonable doubt, we can require no more. Even more
insistent is the petitioners attack, not made below, on the charge of the trial judge
as to reasonable doubt. He defined it as the kind of doubt . . . which you folks in
the more serious and important affairs of your own lives might be willing to act
upon. We think this section of the charge should have been in terms of the kind of
doubt that would make a person hesitate to act, * * * * rather than the kind on which
he would be willing to act. But we believe that the instruction as given was not of
the type that could mislead the jury into finding no reasonable doubt when in fact
there was some. A definition of a doubt as something the jury would act upon
would seem to create confusion rather than misapprehension. Attempts to explain
the term reasonable doubt do not usually result in making it any clearer to the
minds of the jury, * * * and we feel that, taken as a whole, the instructions correctly
conveyed the concept of reasonable doubt to the jury.
b.
The Trial Drill In Summary.
What are the dynamics of a net worth case as it is presented to the jury? The Governments
case-in-chief presenting the method will include a statement that the agent looked for all cash and
other resources on the opening date and that the agent accounting in his reconstruction under the
method for all such assets and resources. If the defendant supplied any leads during the
investigation, the agent will testify that he took reasonable steps to investigate the leads and properly
account for the results of the investigation. The agent will summarize his investigation through the
use of charts with numbers. As we all know, the use of numbers tend to give such a presentation
an authority that it may not really have when the surface is scratched. It is the prosecutors job to
make sure the numbers can withstand some surface scratching.
It is the defendants lawyers job to scratch the surface to show an unreasonable application
of the net worth method. The problem, of course, that the defendants lawyer may not have had any
opportunity to test the application of the method before, and faces the risk that his testing may just
reinforce the adequacy of the application of the method. This is where skillful lawyering pretrial
work and instincts are what permit a lawyer to mitigate the damage from the use of this method.
For example, the defendants lawyer may have presented leads as to nontaxable income
during the investigation. If he did, the agent likely would have testified to that effect and further
testified as to the reasonableness of his or her investigation of the leads. Assuming that the leads
- 705 -
had some substance, the defendants lawyer will then want to test the adequacy of the investigation.
How he does that will depend upon the facts and circumstances, but readers should be able to
understand the drill.
c.
The Leads Investigation and Supplying Leads.
The Governments failure to investigate leads as to nontaxable sources can seriously

undermine the effectiveness and persuasiveness of the net worth method. Thus, one strategy that
a practitioner should consider during the investigation is whether to advise the IRS of leads. Most
practitioners would rather spring their evidence at trial, particularly where there is little hope of
avoiding the prosecution and therefore may not be overly inclined to supply leads during the
investigation. One author has noted:
The leads doctrine nevertheless presents a serious dilemma to taxpayers and their
counsel. If a lead is given, the government may be able to prove that the lead is
inadequate or insufficient to destroy the prosecutions case. On the other hand, if a
lead is not provided, the government is relieved of the obligation to investigate the
lead altogether.1629
Lets use our base example (p. 701) to illustrate how the leads doctrine and trial strategy may
intersect. In that example, the IRSs investigation showed that the taxpayer had opening year net
worth of $50,000. Lets say that he had a checking account with $50,000 which was the only asset
the IRS could locate. The IRS identifies no debt on the opening date. With that critical assumption
of opening net worth and the other components developed by the IRS, the conclusion inferred by
the net worth method is that the taxpayer had $57,000 of unreported income in the two year period.
As indicated above, the taxpayer may assert that the method, as presented by the IRS is flawed,
because he had opening net worth in the form of cash that the IRS did not identify or verify. Now,
lets assume that one month before the opening date of the two year period, the taxpayer as the sole
beneficiary from a remote uncle in a different state had received a $50,000 check from the estate
representing all of the estate assets (no estate tax return). The taxpayer immediately went to Las
Vegas, check in hand, cashed it there, and lost it all within days. Had he retained the $50,000 past
day one of the two year period, the $50,000 might have accounted for enough of the indicated
income that the Government would not have pursued an evasion case on the $7,000 that remained,
the taxpayer did not in fact retain the cash and the net worth method correctly indicates that, during
the two year period, the taxpayer had $57,000 of unreported income.
Is the taxpayer out of luck in defending against the use of the net worth method? Stated
alternatively, can the taxpayer use the inheritance to throw sand in the Governments face as to the
validity of the application of the method? Lets assume that, even if the Government could show
that he cashed the inheritance check in Las Vegas, it is not likely that the IRS could discover proof
beyond a reasonable doubt that he lost the $50,000 at the tables and thus could not exclude the
possibility that he held some or all of it in cash on the critical opening date of the period. Can the
1629
Saltzman, IRS Practice and Procedure, par. 7A.02[1][b][iii].
- 706 -
taxpayer or his attorney affirmatively advise the IRS during the investigation that the inheritance
accounts for $50,000 otherwise unaccounted for cash on the opening date, thereby eliminating the
net worth analysis as a means to obtain a conviction? Obviously, an affirmative misrepresentation
of a known untrue fact would violate 18 U.S.C. 1001, so neither the taxpayer nor his attorney
would want to do that. But, could the attorney for the taxpayer (who remains silent throughout the
period), ask the IRS Special Agent whether the inheritance, just 3 months before the opening date,
had been considered? The implication from merely asking the question is that the money might
account for some significant portion of the otherwise indicated unreported income, and the attorney
knows that it in fact represents no portion of the unreported income otherwise indicated by the net
worth methodology. Is that misleading enough to invoke 18 U.S.C. 1001, although it would not
constitute perjury if under oath because it is literally true that he received $50,000?
Assuming that the attorney for some reason (perhaps his own sense of propriety or perhaps
out of concern that the Special Agent with properly propounded summonses to the casinos could
find out that the had lost the bulk of the $50,000) does not play that game during the investigation,
and the Government proceeds to indict based upon the net worth analysis. The attorney at trial has
the right to test the methodology and part of the methodology is that the Government has correctly
identified opening net worth. Could the attorney then ask the question as to whether the IRS Special
Agent (the Governments summary expert in presenting the methodology to the jury) had considered
the inheritance just 3 months before? Could the attorney justify asking the question which he
knows will imply an incorrect conclusion on the theory that he is entitled and even required by the
ethics of his profession in representing an indicted defendant to test the methodology and asking
whether some significant item that should have been considered but was not considered could bear
upon the reasonableness of the Governments application of the methodology? Is this quibbling
with no material distinction between questioning the methodology and give a misleading
impression? I dont have an easy answer for you, but I do invite you to struggle with the ethics of
this type of situation before you proceed down a path that, in hindsight, someone may think crossed
the line.
d.
An Example the Cash Hoard Defense.
A common nontaxable source that defendants claim to rebut the net worth method is the
existence of a cash hoard at the beginning of the period. That cash hoard, if it exists, could account
for what appear to be increases in net worth later in the period but which are really not increases in
net worth.
The Governments case-in-chief will have as a key component the establishment of
beginning net worth. The agent will testify as to the steps in his investigation of opening net worth,
including specifically investigating any leads whether supplied by the defense or not.
The defendant must find some way to put the cash hoard defense in play. Perhaps the
defendant can do that by his lawyers skillful cross-examination of the agent to show that the agents
investigation of opening net worth was inadequate. At the other extreme, the defendant may testify
- 707 -
that he or she had an unaccounted for cash hoard. That will require the defendant to testify, an
adventure that is fraught with risk in most criminal cases, including most criminal tax cases. Or, the
defendant may find some other way to put the cash hoard defense in play such as in the example
in the previous session or a third partys testimony that he or she gave the defendant a substantial
cash amount as a gift shortly before the opening date.
The Government will attempt to discredit any such evidence of opening cash hoard as best
it can.
But, often the state of the evidence at the end of a case is that the Government has made a
strong net worth case except possibly as to opening net worth. The question is whether the possible
doubt that the defendant attempted to raise about opening net worth is sufficient that the jury will
reject the use of the method and be unable to find the critical tax due and owing element beyond a
reasonable doubt. How much affirmative belief in the existence of the claimed cash hoard is
sufficient to create a reasonable doubt as to the adequacy of opening net worth claimed by the
Government? Do you think, however, that a defendant stands an appreciable risk of loss because
the jury simply doubts that a cash hoard existed? State another way, does the jury have to believe
beyond a reasonable doubt that the cash hoard did not exist or can it acquit on doubt that it
existed.1630
2.
Bank Deposits/Cash Expenditures Method.
The bank deposits/cash expenditures method is also built on logic. It assumes that deposits
into the bank account and expenditures are taxable income unless they came from a nontaxable
source. The IRS must analyze the deposits and expenditures and track down leads that may indicate
a nontaxable source. The formulation is basically as follows, subject to such nuances as the facts
of an individual case require:1631
Total bank deposits
Plus: Payments the taxpayer made in cash (including for capital assets)
Less: Deposits of nonincome items
Less: Payments made from nonincome sources
Yields Total Receipts (or Gross Income)
Less: Deductions (including Business Deductions)
Less: Exemptions
Yields: Taxable Income
1630
See e.g., Friedberg v. United States, 328 U.S. 142 (1954) where all that the jury
verdict established was that the jury did not believe the taxpayer had a cash hoard sufficient to
explain his net worth. This establishes a truism in criminal trials the truth is one thing; what the
jury believes may be another. The everlasting hope of our system is that the procedural safeguards
will insure that the truth and jury belief are the same in the overwhelming number of cases.
1631
I believe I got this from an earlier version of Saltzmans treatise on Tax Procedure,
but do not recall which version.
- 708 -
Obviously, this methodology is based on the notion that cash movement from the taxpayer either
into a bank account or as payment for some good or service or as a gift or other transfer, came from
a taxable source unless there is some indicated nontaxable source.
Focusing just on cash expenditures, the method is logically justified and distinguished from
the direct method as follows:
Both [the cash expenditure and net worth method] proceed by indirection to
overcome the absence of direct proof. The net worth method involves the
ascertaining of a taxpayer's net worth positions at the beginning and end of a tax
period, and deriving that part of any increase not attributable to reported income.
This method, while effective against taxpayers who channel their income into
investment or durable property, is unavailing against the taxpayer who consumes his
self-determined tax free dollars during the year and winds up no wealthier than
before. The cash expenditure method is devised to reach such a taxpayer by
establishing the amount of his purchases of goods and services which are not
attributable to the resources at hand at the beginning of the year or to non-taxable
receipts during the year. The beginning and ending net worth positions must be
identified with sufficient particularity to rule out or account for the use of a
taxpayer's capital to pay for his purchases. If the end-of-year net worth position is
equal to that at the beginning of the year, and if there are no nontaxable sources of
income during the year, such as gifts or inheritances, the totality of the year's
expenditures reflects total taxable income. If ending net worth shows an increase,
the increase reflects an added component of income. If ending net worth shows a
diminution, the decrease reduces pro tanto the extent to which expenditures reflect
income.1632
The methodology is necessarily rough, and whether the judge in the first instance or a jury
as final arbiter will accept it depends upon the skill and diligence of the IRS and Government
prosecutor in employing the method and explaining it at trial. But, if they have done their work, the
method can be used and will be approved.
3.
Other Indirect Methods.
Other indirect methods often just hybrids of the foregoing methods -- may be used where
there a logical inference of taxable income and tax can be reached beyond a reasonable doubt. For
example, in determining income from a business operation, the Government may use a so-called
percentage markup whereby, based on industry averages or statistics, the taxpayer is presumed to
have made a typical markup profit with respect to certain costs for inventory or other costs. This
type of methodology is more often used only in civil cases where the taxpayer has the burden or, at
1632
United States v. Tagilanetti, 398 F.2d 558, 562-3 (1968), aff'd, 394 U.S. 316 (1969)
- 709 -
a minimum, the Governments burden of proof is considerably less than in civil cases.1633 It is rarely
used in criminal cases, except perhaps to indicate the reasonableness of another method.
Similarly indirect methods are available to disprove overstated deductions. For example, the
Government has used a variation of a component of the net worth and expenditures methods to show
that a taxpayer who claimed deductions in a year did not have the cash or other resources available
to pay the amounts claimed.1634 As with those indirect methods, the Governments failure to
properly apply the method will make its case fail,1635 but if the Government applies the method fairly
under the circumstances, it will work.
The point here is that all indirect methods may be available if, under all the circumstances,
they fairly permit a jury to reach the required determination of guilt beyond a reasonable doubt.
C.
A Reprise on Methods.
The following is a good discussion of the intersection of the direct and indirect methods is
illustrated in United States v. Black, 843 F.2d 1456 (D.C. Cir. 1988). In that case, the Governments
case was that certain checks written to the Black by a corporation he controlled were income to him
which he did not report. On its face, this is a specific items approach. Nevertheless, throughout the
trial, the Government and/or its agent witness referred an expenditures approach. The following
is the key excerpt relevant to this discussion:1636
The resolution of Black's claims concerning sufficiency of evidence and
adequacy of the jury charge turns entirely upon the proper characterization of the
actual method used by the Government to prove Black's tax evasion. The
Government contends it employed the specific items method of proof, a direct
method of demonstrating tax evasion in which the Government produces evidence
of the receipt of specific items of reportable income by the defendant that do not
appear on his income tax return. Black claims, however, that the Government used
the bank deposits/cash expenditures method. When using that indirect method of
proof, the Government shows, either through increases in net worth, increases in
bank deposits, or the presence of cash expenditures, that the taxpayer's wealth grew
during a tax year beyond what could be attributed to the taxpayer's reported income,
thereby raising the inference of unreported income.
In any indirect method case, the Government must prove that the increased
wealth did not come from non-taxable sources. Otherwise the evidence will be
1633
See e.g., Kikalos v. United States, 408 F.3d 900 (7th Cir. 2005).
United States v. Gibson, 486 F. Supp. 1230, 1238-39 (S.D. Ohio 1980) (although
rejecting the application of the method in that case because of factual deficiencies).
1635
Id.
1636
I have substantially redacted the following excerpt to make the points I want to make
here, but, as redacted, it is fair as to the courts holding on this point.
1634
- 710 -
insufficient, for there is always the possibility that the taxpayer deposited cash that
he received from a non-taxable source or from income taxed in a prior year but kept
on hand as cash or even from unreported income from a prior year kept on hand in
cash. Such events are common human occurrences, and this possibility may of itself
create reasonable doubt. Therefore, the government must establish in some fashion
the amount of cash the taxpayer had on hand at the start of the period. This is part
of the government's duty to negate the possibility that bank deposits or cash
expenditures in the year under investigation originated from non-taxable sources.
On the other hand, where the Government's case is based on evidence
showing specific items of unreported income, the safeguards required for indirect
methods of proof are not necessary, as the possibility that the defendant may be
convicted because non-taxable income is mistakenly presumed to be taxable income,
or because cash expenditures are mistakenly assumed to be made from taxable
income, is not present.
Black claims that the Government relied on a bank deposits/cash
expenditures method of proof, but utterly failed to rebut the possibility that his
expenditures originated from non-taxable sources, and therefore the evidence was
insufficient to sustain a conviction. In particular, Black maintains that the
Government was obliged to negate the possibility that his bank deposits and cash
expenditures were from non-income sources, and to establish his opening net worth
for the years in question. Black, moreover, argues that the jury instructions omitted
necessary explanations of the assumptions inherent in indirect methods of proof, and
of the inferences that may properly be made by the jury, all in violation of the
Supreme Court's clear guidance in Holland v. United States, 348 U.S. 121 (1954).
In short, Black claims the Government tried to convict him of tax evasion by simply
showing that he spent money and did not file a tax return during the tax years in
question.
In the Government's view, Black received taxable income each time he wrote
a check on the accounts of Dunbar and Machine-A-Rama [his corporations] to cover
his personal expenses. Evidence that Black paid for personal expenses with checks
drawn on corporate accounts and that Black never truly considered the checks to be
loans would be sufficient for conviction, for all the law requires is that there be proof
sufficient to establish that there has been a receipt of taxable income by the accused
and a willful evasion of the tax thereon.
Black, by focusing on isolated remarks at trial, argues that the Government
presented only a cash expenditures case against him. We disagree. If the statements
by the prosecutor, the testimony of the Government's tax witness, and the trial
judge's instructions to the jury, are each considered in light of the evidence actually
- 711 -
submitted, it is clear that the Government presented direct proof that Black received
specific items of taxable income and did not pay tax on that income.
While there were several explicit references to the personal expenditures
method by the prosecutor, the Government's expert witness, and the trial judge in
his instructions, at no point in the trial was it suggested to the jury that evidence of
personal expenditures, without more, would be sufficient to convict Black of tax
evasion. Evidence of personal expenditures was relevant only because the
Government contended that the very writing of the checks created income to Black.
Thus, the danger encountered in a classic cash expenditure case -- that the
defendant could be convicted for spending non-taxable income -- is not at all present
here. In this case, the use of the phrase personal expenditures method was not
associated at all with the cash expenditures method of proving tax evasion; the
phrase was used solely to distinguish Black's business expenditures from his personal
expenditures.
Black's defense to the tax charge was not that the expenditures were made
from a source of non-taxable income unknown to the Government, for example an
inheritance or a sum of cash squirreled away in previous years, yet that would be a
typical defense in a cash expenditures case. Rather, Black argued that the specific
items of income the Government alleged he received -- the checks drawn on the
Dunbar and Machine-A-Rama accounts and used for personal expenses -- were loans
that he was obligated to repay to Dunbar and Machine-A-Rama, and therefore were
not income.
That claim, however, the jury was entitled to reject, as their verdict indicates
they did. Viewing the evidence most favorably to the Government, the Government
established that Black received substantial taxable income that he did not report to
the IRS. We thus decline to reverse Black's conviction on the grounds of insufficient
evidence.
We thus reject Black's argument that under the reasoning of United States v.
Meriwether, 440 F.2d 753 (5th Cir. 1971), we should reverse because the jury might
have convicted Black merely because he spent money. In Meriwether the jury was
instructed on both a specific items and net worth method of proof, with the emphasis
placed on the net worth method. The court of appeals reversed because the
instructions on the net worth method were flawed and there was no way to be
certain upon which method of proof the jury based its verdict of guilty. In this
case, however, the jury was never instructed on the cash expenditures method, nor
was it ever argued to the jury that Black could be convicted on the theory that cash
expenditures were circumstantial evidence of taxable income. Ironically, a tax
lawyer sitting in the courtroom could perhaps have been confused by the use of the
phrase personal expenditures method, for it might well have suggested the cash
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expenditures method, but the slight possibility that a jury never instructed on the cash
expenditures method would have been confused is so insignificant that it cannot
justify a reversal on grounds of plain error.
Finally, be creative in your consideration of indirect methodologies. The defense as well as
the prosecution can use indirect methodologies.1637 The defense can use such a methodology early
on in an investigation to try to convince the IRS CI agent that there is not enough tax at stake to
justify completing the investigation or, if completing, to recommend a criminal prosecution to DOJ
Tax; if nothing else the use of an indirect methodology may give you information that a reluctant
client might be unwilling or unable to give.1638 The defense also could conceivably use it in its casein-chief at trial to establish that the Governments methodology is flawed and wrong.1639 The point
I am making is that the defense should consider the benefits of an indirect methodology at key points
in the defense representation, from inception of the investigation forward.
D.
Defense Strategies.
Each of these methods particularly the indirect methods -- produce rough calculations of
tax due and owing. They are only as good as the underlying diligence of the investigator in the
investigation. A critical defense strategy will not only be to pot-shot the specifics of the
methodology, but to show that the investigator did not pursue reasonable leads. This can put a target
at some risk in disclosing leads and thus potential defenses prior to trial. But, providing the
investigator leads or hints of leads can potentially set the stage for attack on the basis that the
1637
Kikalos v. United States, 408 F.3d 900 (7th Cir. 2005) (Posner, J.) is an excellent
example of both sides in a tax case using indirect methodologies to support its case. Kikalos was
not a criminal case, but it illustrates the point that what is sauce for the goose may be sauce for the
gander. See also my article, John A. Townsend, Judge Posners Decision in Kikalos, 108 Tax Notes
593 (Aug. 1, 2005).
1638
As I said in my article cited in the preceding footnote:
For example, in a criminal investigation in which the CI special agent is hellbent on
tagging your client with a crime for unreported income, those types of indirect
methods if credible may be able to avoid a prosecution or conviction. One of the first
things I do in a case in which the IRS special agent is trying to chase down additional
income that my client denies (to me) having received is to have the Kovel accountant
perform some type of indirect method check (such as net worth or bank deposits) to
test for unreported income.
1639
The problem with using it in the defense case-in-chief, of course, is that the defenses
indirect methodology may be flawed, thus weakening the defense case and potential credibility, or
the defenses indirect methodology may even indicate some tax due and owing, particularly, when
corrected via cross-examination.
- 713 -
investigator did not pursue reasonable leads.1640 Of course, the lead must suggest some potential
relief to the target so that it is fair to reject the methodology for failure to pursue the lead.1641
In United States v. Scott,1642 the Government successfully established that it followed leads.
The taxpayer was a politician who attempted to rebut the Governments net worth method by urging
that he had received gifts from up to 100 persons, thus accounting for this increase in net worth. The
defendant gave DOJ a list of the persons. The Government introduced a memorandum indicating
that the agent had contacted the people on the list and that 75 reported that they gave only nominal
amounts. This, of course, was not hearsay, since the memorandum was introduced in conjunction
with the agents testimony to show the reasonableness of the investigation of leads, not the truth of
the statements the putative donors made to the agent. (Note the fiction as with hearsay generally is
that the jury would be able to understand any limiting instruction as to the use of the testimony and
use it only for that limited purpose.)
V.
The IRS Agent as Witness - Summary, Overview and Expert.

A.
Differentiating The Roles.
Frequently in tax prosecutions, the Government calls one of the Special Agents involved in
the investigation or another IRS agent as a witness. Except in the case of a false statement
prosecution or perhaps an obstruction prosecution, the IRS Agent (either Special or otherwise) will
not have direct evidence. The IRS Agent will be called as a summary witness to summarize other
evidence admitted in the case or as an expert witness to testify as to matters requiring expertise of
potential benefit to the trier of fact.
FRE 1006 permits the IRS agent as summary witness to summarize the admitted evidence
from the Governments standpoint in order to assist the trier in understanding the evidence.1643 To
use a simple example, 150 checks payable to the defendant from 10 different payors representing
income to the defendant have been admitted into evidence, an IRS agent to summarize that evidence
in some way meaningful to the jury e.g., if appropriate, the IRS agent could have broken down the
checks and check sums by payor, with a chart of the compiled results. The IRS Agents chart and
testimony explaining the chart could be admitted and would be subject to cross-examination. The
need for a summary witness usually occurs in situations far more complex than this simple example,
but the IRS Agent as summary witness can only summarize the evidence that has been admitted.
The Agent will identify the underlying evidence which he or she summarizes so that it is clear to the
1640
United States v. Keller, 523 F.2d 1009, 1011 (9th Cir. 1975).
See Scanlon v. United States, 223 F.2d 382, 388-89 (1st Cir. 1995); United States v.
Anderson, 642 F.2d 281, 285 (9th Cir. 1981).
1642
660 F.2d 1145 (7th Cir. 1981).
1643
United States v. Bishop, 264 F.3d 535, 547 (5th Cir. 2001); and United States v.
Griffin, 324 E3d 330, 349-350 (5th Cir. 2003). Some courts also refer to FRE 611 allowing the
court general control of the proceedings in order to avoid needless waste of time.
1641
- 714 -
jury that, if the underlying evidence is not proved beyond a reasonable doubt, the Agents summary
of the evidence is moot.
The Government sometimes will use the summary witness paradigm to have the witness
speak broader than narrow areas where summaries might be helpful to the trier and give an overview
of the prosecution case. As I develop in more detail below, there is considerable concern about the
use of such an overview summary witness. At this point, however, you should just think of the
overview witness as a type of summary witness.
As an expert witness, an IRS Agent offers expert testimony which must meet the
requirements for expert testimony.1644 Often, for example, the Agent will be qualified to offer
expertise in the computation of a tax liability.
Sometimes the Agent will serve in both capacities and, indeed, his or her testimony may
blend. Consider the following where the defendant on appeal complained that an IRS agent called
as a summary witness had also impermissibly provided expert testimony (case most citations and
internal quotations omitted for readability):
Ms. Pree contends, however, that Agent Welch exceeded his role as a
summary witness and provided inadmissible expert testimony in the guise of a
summary witness. We believe Agent Welch primarily testified within his role as a
summary witness. However, we acknowledge that, in such a case as the present,
where an IRS Revenue Agent summarizes the evidence for purposes of establishing
the tax consequences, the line between summary testimony and expert testimony is
indistinct. Given the assistance such an individual can provide to the jury, it has not
been unusual in previous cases for an IRS agent to testify as an expert summary
witness. As a summary witness, an IRS agent may testify as to the agent's analysis
of the transaction which may necessarily stem from the testimony of other witnesses.
The agent may also explain his analysis of the facts based on his special expertise.
As an expert witness, an IRS agent's opinion as to the proper tax consequences of a
transaction is admissible evidence. Similarly, an IRS expert's analysis of the
transaction itself, which necessarily precedes his or her evaluation of the tax
consequences, is also admissible evidence.
Here, Agent Welch analyzed the stock sales and described the income tax
consequences. Although he was not proffered as an expert witness, his qualifications
were in evidence. Those qualifications included eighteen years of service with the
IRS as a revenue agent, a bachelor's degree in accounting and a master's degree in
taxation. While employed by the IRS, he completed additional classes in taxation,
specialized training and continuing professional education. At the time of trial, he
had conducted approximately two hundred tax audits and had reviewed several
thousand audits of other revenue agents. Agent Welch was therefore qualified to
1644
See Daubert v. Merrell Dow Pharm., Inc., 509 U.S. 579 (1993).
- 715 -
express an opinion as to the proper tax consequences of a transaction and of the

transaction itself, which necessarily precedes his . . . evaluation of the tax
consequences.
Ms. Pree further contends that Agent Welch's testimony was inadmissible to
the extent that he stepped into the role of an expert because he failed to use a
recognized means of valuation of restricted stock. Agent Welch testified that the
stock had no fair market value by virtue of the restriction because it could not be sold
in a brokerage house. Admittedly, Agent Welch's statements to this effect were
somewhat imprecise. Restricted stock does not lack value, per se, because it cannot
be sold on the public market. Had Ms. Pree raised an objection to Agent Welch's
testimony, on the ground that it constituted unreliable expert testimony, the district
court would have undertaken the gatekeeping analysis Ms. Pree now recommends
to this court. See Daubert v. Merrell Dow Pharm., Inc., 509 U.S. 579 (1993); see also
United States v. Conn, 297 F.3d 548, 557 (7th Cir. 2002) (indicating, in reference to
a witness who was not proffered as an expert but testified in that role, that [h]ad the
defense had other concerns about the quality of [the agent's] training, the quantity of
his experience, or the methodology that he employed in reaching his assessment of
[the defendant's] firearms, it could have raised those questions during voir dire).
In the absence of an objection by Ms. Pree to Agent Welch's testimony as
unreliable expert testimony, however, we do not perceive plain error. The
conclusion that Ms. Pree's basis in the stock should be treated as zero was supported
by sufficient evidence. Moreover, Ms. Pree's counsel had an opportunity to
cross-examine Agent Welch as to his conclusions regarding the value of the stock.
See United States v. Gonzalez, 933 F.2d 417, 429 (7th Cir. 1991) (indicating that
any questions or problems concerning the expert's opinion and testimony may be
thoroughly explored during the cross-examination of the expert witness).
Ms. Pree also challenges Agent Welch's testimony as outside his area of
expertise and improperly selective. We find no error on these grounds. First, Agent
Welch's testimony did not fall outside his area of expertise in violation of our holding
in Benson. In Benson, we held that an IRS agent's opinion as to whether the
defendant was entitled to social security benefits was outside the agent's area of
expertise and thus not admissible as expert testimony. Unlike the testimony at issue
in Benson, Agent Welch's testimony dealt directly with the tax consequences of Ms.
Pree's stock sale transactions and the necessary underlying analysis of those
transactions.
As a final response to Ms. Pree's various challenges to Agent Welch's
testimony, we emphasize Ms. Pree's ample opportunity to cross-examine and to
present her own evidence. Ms. Pree's counsel elicited from Agent Welch an
explanation of capital gain as a net figure. Consistent with the defense theory,
- 716 -
counsel then explored the computation of gift basis and capital gains and losses from
the sale of gifts with Agent Welch. Counsel also attempted to explore Agent Welch's
conclusions as to the fair market value of the stock when Ms. Pree received it, but
counsel then abandoned the cross-examination on this point. Ms. Pree also had an
opportunity to present evidence as to her basis and to the proper valuation of the
stock. Given these opportunities, we conclude that no plain error occurred in the
district court's admission of Agent Welch's testimony. [W]here, as here, the defense
conducted a thorough cross examination of the witness concerning the disputed
matters, and also had the opportunity to present its own version of those matters, the
likelihood of any error in admitting summary evidence diminishes. United States
v. Norton, 867 F.2d 1354, 1363 (11th Cir. 1989).1645
The potential blending of the roles of summary witness and expert witness addressed in Pree
is a potentially troublesome area with hazy lines. In a recent case, after describing the IRS agents
relatively straightforward determinations of income, expense and resulting tax liability, the court
beat back a challenge that the testimony included improper expert testimony for which the agent had
not been qualified as an expert.
Pleshaw's testimony fits comfortably within the mine-run of permissible
summary witness testimony in tax cases. We have recognized as a general
proposition that testimony by an IRS agent that allows the witness to apply the basic
assumptions and principles of tax accounting to particular facts is appropriate in a
tax evasion case. The key to admissibility is that the summary witness's testimony
does no more than analyze facts already introduced into evidence and spell out the
tax consequences that necessarily flow from those facts. See United States v. Pree,
408 F.3d 855, 869 (7th Cir. 2005). We hold, therefore, that in a tax evasion case, a
summary witness may be permitted to summarize and analyze the facts of record as
long as the witness does not directly address the ultimate question of whether the
accused did in fact intend to evade federal income taxes.
The defendant struggles to parry this thrust. He points out that a summary
witness may not give legal opinions that purport to determine a defendant's guilt, nor
may such a witness instruct the jury on controlling legal principles. Those
generalizations are true as far as they go, but neither generalization was offended
here. A careful review of the record shows that Pleshaw's testimony did not trespass
into this forbidden terrain. He summarized the evidence and stated his conclusions
regarding what that evidence showed as to the defendant's tax liability for the years
in question. The characterizations that he made en route to those conclusions
(classifying various entries as, say, income or expenses) did not represent
impermissible legal opinions but, rather, under the methodology that Pleshaw used,
1645
United States v. Pree, 408 F.3d 855, 869-871 (7th Cir. 2005); this text seems to
substantially track the language of an earlier opinion in the same case. United States v. Pree, 384
F.3d 37 (7th Cir. 2004).
- 717 -
were part of a mechanical sorting of entries (e.g., classifying all receipts as income
and all withdrawals as expenses). n2
n2 We caution that situations exist in which the characterization of a specific item
may call for a legal opinion. See, e.g., Comm'r v. Duberstein, 363 U.S. 278, 280
(1960) (addressing whether a specific transfer to a taxpayer should be characterized
as a gift or as income). Here, however, Pleshaw's computations were transparent, the
taxonomy that he employed was neither complex nor sophisticated, and he appears
to have given the defendant the benefit of every plausible doubt.
The defendant mentions in passing that the district court did not allow
Pleshaw to testify as an expert. That is true, but it ignores both that the government
gave appropriate advance notice of its intention to offer Pleshaw's testimony and that
Pleshaw had the credentials needed to offer expert opinion testimony. Despite these
facts, the district court decided that, considering the limited use that the government
proposed to make of him, there was no need for him to testify as an expert.
We see no error. Our cases suggest that expert witness status is not always
a condition precedent to allowing an IRS agent to testify as a summary witness in a
tax evasion prosecution. While such testimony sometimes may require expert
qualification -- the relative simplicity or complexity accompanying tax calculations
can vary greatly -- the calculations here were both straightforward and transparent.
Accordingly, it was within the district court's discretion to allow Pleshaw to testify
without first qualifying him as an expert witness.
That ends this aspect of the matter. Nothing in the record indicates that
Pleshaw's testimony crossed the line or morphed into an opinion about the
defendant's intent. Pleshaw simply did the math. The defendant's claim of error is,
therefore, unavailing.
B.
The Summary Witness.

1.
General.
a.
Admitted Evidence.
A good summary of the summary witness role is contained in a Fifth Circuit opinion:
The use of summary testimony and documents is governed by Rule 1006 of
the Federal Rules of Evidence, which is broadly interpreted. Rule 1006 allows
admission of summaries when (1) the evidence previously admitted is voluminous,
and (2) review by the jury would be inconvenient. A summary may include only
- 718 -
evidence favoring one party, so long as the witness does not represent to the jury that
he is summarizing all the evidence in the case.
Summary evidence must have an adequate foundation in evidence that is
already admitted, and should be accompanied by a cautionary jury instruction. Full
cross-examination and admonitions to the jury minimize the risk of prejudice. We
previously approved a cautionary instruction that summaries do not, of themselves,
constitute evidence in the case but only purport to summarize the documented and
detailed evidence already submitted, and an instruction that a witness's summary is
not the evidence, the evidence is the documents themselves that he has been referring
to.
Summary charts in particular are admissible when (1) they are based on
competent evidence already before the jury, (2) the primary evidence used to
construct the charts is available to the other side for comparison so that the
correctness of the summary may be tested, (3) the chart preparer is available for
cross-examination, and (4) the jury is properly instructed concerning use of the
charts. Summaries may accompany the jury to the jury room.1646
Logically, the underlying evidence being summarized must be admissible evidence.
Otherwise, Rule 1006 would would inappropriately provide litigants with a means of avoiding rules
governing the admission of evidence such as hearsay.1647 And, of course, the proponent of the Rule
1006 summary bears the burden of establishing its admissibility (including the admissibility of the
underlying evidence being summarized.1648
Tax cases and other cases involving the interface of complex facts to legal duties often
require some context as to the law in order to make the facts summarized understandable. A
summary witness is then acting as an expert witness. Consider the following:
1646
United States v. Bishop, 264 F.3d 535, 547 (5th Cir. 2001) (citations omitted).
United States v. Irvin, 682 F.3d 1254, ___ (10th Cir. 2012) (quoting United States
v. Samaniego, 187 F.3d 1222, 1223 (10th Cir. 1999).)
1648
Id. In Irvin, the summarized evidence was loan files of title companies but on one
from the title company authenticated the records or established that they were the title companies
business records which would have invoked an exception to the hearsay rule. The district court
invoked the exception, however, because it had heard nothing that contradicts the idea that [the
loan files] are business records and would meet the business records exception. The Court of
Appeals said that reversed, holding that the evidence proponent i.e., the prosecution must show
that the business records exception is met and that the trial court cannot assume the conditions of
the exception simply because there is no evidence that the conditions were not met. Regarding
business records, the Irvin court also recognized, but declined to rule on, a so-called adoptive
business records concept whereby one business, by incorporating a business record of another
business, qualifies that incorporated or adopted business record based solely on the incorporation,
thus making the contents of the incorporated or adopted business record not hearsay.
1647
- 719 -
Pleshaw provided the jury with a summary of why the IRS determined that
the deductions claimed by Mikutowicz and his companies were improper. It is well
established in several circuits that expert testimony by an IRS agent which
expresses an opinion as to the proper tax consequences of a transaction is admissible
evidence. The primary limitation on this type of evidence is that the agent may not
testify about the defendant's state of mind when the challenged deductions were
claimed. See Fed. R. Evid. 704(b) (expert may not testify to mental state of
defendant where mental state is element of charged offense); Sabino, 274 F.3d at
1067 (In a tax case, the summary witness is allowed to summarize and analyze the
facts indicating willful tax evasion so long as the witness does not directly embrace
the ultimate question of whether the defendant did in fact intend to evade income
taxes.) (internal quotations and citations omitted); Windfelder, 790 F.2d at 582
(stating that it was error, in tax fraud case, to admit IRS agent's testimony that
defendant intentionally understated his income because this testimony
impermissibly stated an opinion as to the defendant's knowledge or willfulness, a
mental state which constitutes an element of the crimes charged); see also United
States v. Valle, 72 F.3d 210, 216 (1st Cir. 1995) (Rule 704(b) prohibits all direct
expert testimony concerning a criminal defendant's intent, regardless of the witness's
field of expertise, so long as intent is an element of the crime charged.).1649
If such summary evidence is allowed, a cautionary instruction to the jury is required to
inform the jury that of the purpose of the summary and that the summary is not itself evidence.1650
This limiting instruction to the jury is critical. Consider the following:
Ms. Pree also challenges the admission of Government Exhibits 101 and 102
without a limiting instruction as plainly erroneous. Other courts have held that a
cautionary instruction should be given when summary evidence is admitted. See,
e.g., United States v. Bishop, 264 F.3d 535, 547 (5th Cir. 2001) (noting previously
approved instructions that summaries do not, of themselves, constitute evidence in
the case but only purport to summarize the documented and detailed evidence
already submitted, and a witness' summary is not the evidence, the evidence is the
documents themselves that he has been referring to). We ourselves have indicated
that, when summary charts are introduced into evidence as a teaching device rather
1649
United States v. Mikutowicz, 365 F.3d 65 (1st Cir. 2004) (case citations selectively
omitted for readability). In that case, the court cited the expert witness rules in discussing the
Governments right to have the agent (Pleshaw) testify that the transactions were taxable but later
in the opinion (at p. 73) in rejecting the defendants complaint about the scope of the allowed crossexamination of Pleshaw said Pleshaw was not qualified as an expert on tax law. This appears
facially inconsistent with the prior indication that the court perceived Pleshaw was giving expert
testimony in putting context to his summary evidence. I think I could rationalize the apparent
inconsistency, but space limitations suggest I just let it go.
1650
United States v. Sabino, 274 F.3d 1053, 1067 (6th Cir. 2001); United States v. Pree,
408 F.3d 855 (7th Cir. 2005); and United States v. Bishop, 264 F.3d 535, 547 (5th Cir. 2001).
- 720 -
than as substantive evidence, the preferred practice is o give a limiting instruction

regarding this purpose.
No such instructions were given here; rather, a pattern instruction was given
with regard to the summary evidence that stated that the summaries truly and
accurately summarize the content of voluminous books, records or documents, and
should be considered together with and in the same way as all other evidence in the
case. The Committee on Federal Criminal Jury Instructions for the Seventh Circuit
advises that this instruction should only be given when the accuracy and
authenticity of the exhibits are not in question. Pattern Criminal Federal Jury
Instructions for the Seventh Circuit 3.15 (1998). The accuracy of Government
Exhibits 101 and 102 were not challenged at trial. Although the preferred practice
with respect to summary evidence is to issue an appropriate cautionary instruction,
under the circumstances here, the admission of the summary evidence without such
a limiting instruction was not plain error. See also Swanquist, 161 F.3d at 1072-73
(indicating that the defendant had an opportunity during cross-examination to elicit
facts suggesting the inaccuracy of summary charts and noting that a party is not
obligated . . . to include within its charts or summaries its opponent's version of the
facts).1651
b.
Quasi-admitted or Admissible but not Admitted Evidence.
I hope the reader intuits that this is a funky category. How can a summary witness
summarize evidence not before the jury? Good question. The materials above say that FRE 1006
requires that the evidence be admitted. The Rule does not say that. The Rule is short, so I quote
it:
The contents of voluminous writings, recordings, or photographs which cannot
conveniently be examined in court may be presented in the form of a chart, summary,
or calculation. The originals, or duplicates, shall be made available for examination
or copying, or both, by other parties at reasonable time and place. The court may
order that they be produced in court.
Notice particularly that the court may order that the underlying writings, recordings or
photographs be produced in court. The requirement, however, is that the documents being
summarized be otherwise admissible.1652
I have an anecdotal experience to share that does not offer final answers. So, here goes. In
the massive KPMG criminal litigation, styled United States v. Stein,1653 the Government prosecuted
1651
United States v. Pree, 408 F.3d 855, 871-872 (7th Cir. 2005).
United States v. Janati, 374 F.3d 263, 272-273 (4th Cir. Va. 2004)
1653
(S.D. N.Y. S1 05 Crim. 0888 (LAK)). At this point, I defer the subsequent
proceedings in this case because they would be a distraction to the point made above. Suffice it to
1652
- 721 -
the defendants involved in the creation and marketing of allegedly abusive tax shelters to many
taxpayers over several years. The case was billed as the largest criminal tax fraud case ever. As in
all litigation, the parties listed their witnesses and exhibits. The Government listed 1987 marked
exhibits and 3000+ so-called compilation exhibits. The Government described the compilation
exhibits as tax returns, closing agreements and revenue agent reports relating to these [tax shelter]
transactions. It was not entirely clear that the Government was going to have those unmarked
compilation exhibits formally admitted into evidence (logistically, how exactly do you do that if they
are not marked?). The Government was going to have a summary witness testify as to the
compilation exhibits but not submit the compilation exhibits to the jury. This case was subsequently
skinnied down substantially after 13 of the original 19 defendants were dismissed, and I am not sure
exactly what happened to this compilation exhibit strategy.
Nevertheless, the issue here is what authority is there for a such strategy to have a witness,
such as an IRS agent, testify as to his or her conclusions as to unadmitted or perhaps quasi-admitted
evidence. The answer is, I dont know. But, I presume that it would have to be admitted under
the judges general authority under FRE Rule 611(a) and perhaps would require that the
compilation exhibits be in fact admitted but just not submitted to jury (at least not submitted
unless the opposing party makes some substantial issue as to the propriety of the summary testimony
about the exhibits.
Finally, the FRE 6001 basis for such evidence blends with the general rule under FRE 611(a)
which provides:
(a) Control by court. The court shall exercise reasonable control over the mode and
order of interrogating witnesses and presenting evidence so as to (1) make the
interrogation and presentation effective for the ascertainment of the truth, (2) avoid
needless consumption of time, and (3) protect witnesses from harassment or undue
embarrassment.
So, at the risk of going too far on this issue, I present a lengthy and excellent excerpt from a
decision1654 by Judge Jack B. Weinstein, the original author of Weinsteins Federal Evidence (LexisNexis), now in its second edition. Because of the length and for pedagogical reasons, I have
redacted the some of the quotation marks and all of the case citations (even when having explanatory
comment or quotations), so I encourage the reader with the interest to read the case in its original.
Also, Judge Weinsteins segues from the topic to a broader discussion of how the trial of the future
will be enhanced by computer presentations, subject to the general control that the trial judge must
say that, in other respects, this turned out to be a very important case. See United States v. Stein,
541 F.3d 130 (2d Cir. 2008) (sustaining dismissal of 13 of the original 19 defendants for
prosecutorial abuse in forcing KPMG to withdraw attorneys fee support).
1654
Verizon Directories Corp. v. Yellow Book USA, Inc., 331 F. Supp. 2d 136 (EDNY.
2004), subsequent history at Verizon Directories Corp. v. Yellow Book USA, Inc., 338 F. Supp. 2d
422 (EDNY 2004), but not relevant to the portion of the original case quoted in the text.
- 722 -
exercise over the trial (the same type of control the trial judge exercises for such summary
witnesses).
A. General Current Practice Excluding as Evidence
Pedagogical devices or demonstratives have long been recognized in the form
of summaries, charts and other aids used by parties to organize or aid the jury's
examination of testimony or documents which are themselves admitted into
evidence. It is a common view among courts that such pedagogical devices are not
evidence themselves, but are used merely to aid the jury in its understanding of the
evidence that has already been admitted. The use of such material in court is
typically governed by Rule 611(a) of the Federal Rules of Evidence. See Fed. R.
Evid. 611(a) ("The court shall exercise reasonable control over the mode and order
of . . . presenting evidence so as to (1) make the . . . presentation effective for the
ascertainment of truth. . . .").
Courts have generally declined to treat pedagogical devices as evidence.
Although courts employ different terms for the aids, most circuits have generally
excluded the devices from evidence.
In contrast to other decisions of the Court of Appeals for the Ninth Circuit,
one panel of that court has seemingly sanctioned the admission of pedagogical
devices under an abuse of discretion standard. The Court of Appeals for the Sixth
Circuit, in dicta, has recognized instances in which the admission of pedagogical
devices is appropriate:
We note in passing that in appropriate circumstances not only may such
pedagogical device summaries be used as illustrative aids in the presentation
of the evidence, but they may also be admitted into evidence even though not
within the specific scope of Rule 1006. Such circumstances might be
instances in which such pedagogical device is so accurate and reliable a
summary illustration or extrapolation of testimonial or other evidence in the
case as to reliably assist the factfinder in understanding the evidence,
although not within the specific requirements of Rule 1006.
Pedagogical devices are often unfavorably compared to summaries admitted
under Rule 1006. Summaries, unlike Rule 611(a) aids, are admissible as proxies for
voluminous records which cannot be examined in court. Fed. R. Evid. 1006.
Exclusion of pedagogical devices is grounded in the idea that such aids are more akin
to argument than evidence since they organize the jury's examination of testimony
and documents already admitted in evidence. Nevertheless, the distinction between
Rule 1006 summaries and Rule 611(a) pedagogical devices is often ignored by
courts, and many admitted summaries actually restate previously admitted evidence.
- 723 -
One commentator found that in one hundred percent of a sample of health care fraud
cases the courts allowed pedagogical tools into evidence. The evidence treatises
caution that pedagogical devices should be used only in conjunction with proper
limiting instructions, that jury aids are not evidence-in-chief but are only the
proponent's organization of the evidence presented.
B. Theory and Practice Supporting Admission in Evidence
The purpose of a trial is to reveal the relevant real-world facts and to draw
inferences leading to proof or disproof of operative elements of a cause of action; it
is essentially a teaching-learning process. As the eminent professors Jerome Michael
and Mortimer Adler put the matter:
In its logical aspect the trial of an issue of fact can be viewed as a
process of teaching: By their proof and disproof of the contradictory
propositions of which the issue is constituted, the litigants impart to the jury
the knowledge which it needs in order to resolve the issue. The process
which, from the point of view of jurors, is a passive affair of learning or
inference and, from the point of view of litigants, an active affair of teaching
or proof, is a single process.
Forensic courtroom teaching is expected to be grounded in the real world.
Evidence of that world is produced, and from that evidence, using hypotheses,
generally based on knowledge the trier brings to the case, opinions are formed. They
are based upon rational syllogisms, leading to conclusions about statements of fact
that are material propositions (sometimes called operative facts) defined by the law.
Michael and Adler describe the kinds of knowledge involved in a trial:
(1) Knowledge which the jury has independently of the evidence and proofs
of the litigants, most of which it will possess prior to the trial because in the
locality of the trial such knowledge is common to ordinary men or ordinary
experience, but some of which it may acquire during the trial; (2) knowledge
which the jury acquires by means of its sense in the observation of things and
events which the litigants are permitted to introduce as evidence; (3)
knowledge which the jury acquires by means of its reason in making the
inferences involved in the steps and lines of proof which the litigants are
permitted to accomplish; and (4) knowledge which witnesses are permitted
to report or which is contained in documents which the litigants are permitted
to exhibit to the jury.
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Without knowledge of the third sort, that obtained inferentially during

a trial by its rational powers, a jury could never decide a material issue; if it
could, a trial need not and would not involve proof.
The claim in this case is relatively simple: false or misleading advertising was
used by defendant to harm the plaintiff. The methods of proof, however, involve
complicated statistical data and expert testimony. This intricacy of proof is
increasingly typical of federal trials. Michael and Adler's third type of knowledge,
using the inferential powers of the jury and court, is difficult to acquire in such trials.
Jurors can be authorized to take notes, but if the evidence and case are too
complicated, their on-the-run jottings will do them little good in their jury room
reasoning; ultimately, it is the trier's ability to think clearly in integrating evidence
and arguments and in drawing rational conclusions that is the essence of our system
of trials.
The revolution in communicating that has occurred and is still occurring may
sometimes be distracting, but it can strengthen the ability of courts to seek truth.
Technology in litigation has changed enormously since the adoption of the Federal
Rules of Evidence in 1975. In any complex case, computer-generated presentations
are the norm rather than the exception. As one commentator put it, desktop portable
computers now bedeck courtrooms like dandelions in May and, like dandelions, their
number, use and application continue to grow.
Subject to Rule 403, with somewhat more stringent control in jury trials,
pedagogical aids should generally be admitted as evidence. They can be helpful to
the court's understanding of the complex and voluminous amount of evidence
presented, as in this case. The court is not as susceptible to the confusion the
admission of such evidence might induce in juries. But this evidence should also be
admitted as evidence in jury trials if it satisfies the requisites of Rules 402 and 403
of the Federal Rules of Evidence. [FRE 402 requires relevance for admission, and
FRE 403 requires exclusion of even relevant evidence if the evidence is for some
reason not helpful to the resolution of the issue.]
Evidentiary rulings should be guided, as usual, by Rule 403. The district
court's normal discretion can be utilized to mitigate situations in which parties have
vastly different resources, creating an uneven technological playing field. In the
instant case, both parties have the financial wherewithal to present comparable
computer-generated evidence. The suggestion that trials are turning into legal smoke
and mirror laser shows, lacking real substance, has no merit where the court
exercises appropriate control.
In light of ever-changing technology, wide ownership of personal computers,
expanding use of the internet, and personal digital assistant devices, among other
- 725 -
electronic innovations, the layperson is increasingly immune to confusion by the

encroachment of technology into heretofore primitive communication zones such as
the jury room.
The day may soon come when jurors routinely have individual computers or
computer monitors in the jury room. Most testimony in federal trials is already
recorded electronically. It is the usual practice for parties to maintain backups of
computer-generated evidence in the event of computer malfunction. Disks can be
easily scrubbed to eliminate extraneous portions and "corrected" new disks fed into
the jury room as needed, eliminating endless readbacks and enabling the court to get
onto the next case without delay.
Modern juries take notes, have notebooks containing key evidence, and can
ask questions through the court. In the near future, they may have notebook
computers. They need not be treated as illiterates as under the old English practice.
Federal courts have sought to exclude outside influences from the courtroom.
But the use of technology is not inconsistent with calm deliberations based on
material properly vetted for the courtroom. Whether automation within the courts
changes as rapidly as it is capable depends on budget restrictions, the rate at which
judges and managers become comfortable with automation, and the rate at which
technical support staff can adapt to new technologies.").
There are now relatively few trials in the district courts, but when they do
take place, substantial technological and other effort is often expended to present a
case.
Presenting an appellate court with only a print transcript would drain much
of the color and depth from the presentation that occurred in the courtroom. There
is no reason appellate judges should deny themselves the same learning advantages
available to trial judges, juries and the world at large.
Yet, since the courts of appeal are already over-burdened, they may not have
the time to fully review computer-generated and other pedagogical evidence. The
Court of Appeals for the Second Circuit has, for example, sometimes taken a narrow
view of the admissibility of audio-visual evidence. In a jury trial, the court must be
particularly careful to avoid the interjection of material that an appellate court may
believe to contain unacceptable hearsay, prejudicial opinions or other material, even
though it is easily discountable by properly instructed jurors.
There may be occasions when the ability of the attorney to utilize
computer-generated evidence to manipulate the viewer's subconscious may escape
the awareness of the court. In the instant case, for example, the choice of red-colored
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text for the plaintiff's subtitled video depositions and blue-colored text for the
defendant's selections could be motivated by a reasonable belief that red and blue
text have varying influences on the viewer.
Courts should be aware of the heightened power of audio-visual evidence.
Showing the trier deposition testimony in color, for example, revealing vivid body
language, pauses and verbal emphasis, sometimes elicits a different reaction from the
viewer than would a reading of a typed transcript. The trial court must exercise
appropriate sensitive control over the proceedings, issuing limiting instructions when
appropriate, to ensure that the results of a trial are not tainted by misunderstanding
and prejudice.
Increased flexibility in the use of educational devices will probably result in
courtroom findings more consonant with truth and law. Whether designated as
pedagogical devices or demonstratives, this material may be admitted as
evidence when it is accurate, reliable and will assist the factfinder in understanding
the evidence. Present highly professional and skilled counsel agree. They have
stipulated to admit in evidence each of the non-stricken excellent pedagogical
devices used in the trial.
2.
Overview Witness.
The overview expansion of the summary witness technique may be analogized to the other
types of overview presentations the opening and closing arguments to the jury. However,
overview testimony by a Government agent may be particularly subject to abuse since juries tend
to view with caution the arguments of the lawyer, but may credit as more persuasive those same
arguments presented as overview testimony.1655 Moreover, broad overview testimony rather than
more focused summary testimony lends itself to real dangers of stating facts that are not in
evidence.1656
The cases that have raised significant concerns about the overview witness involve situations
where the overview witness testified before the end of the case and sometimes fairly early on in the
beginning.1657 The danger is that the witness summary will include matters not yet in evidence and
indeed matters that never get into evidence. In either case, there is the danger of giving undue credit
simply because it comes from a Government witness is great. Still, in a particularly complex case,
1655
United States v. Casas, 356 F.3d 104 (1st Cir. 2004) (overview testimony by
government agents is especially problematic because juries may place greater weight on evidence
perceived to have the imprimatur of the government.); see also Barry Tarlow, Queen for a Day -Proffer Your Life Away, 29 Champion 53 (2005) (the second part of this article does not deal with
proffers, but rather deals with the overview witness).
1656
See Tarlow article, supra.
1657
E.g. United States v. Casas, supra; and United States v. Griffin, 324 E3d 330 (5th Cir.
2003).
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the Government should be allowed at the end of the complex evidence (even if many days and many
documents are involved) to summarize the key evidence actually admitted that can be helpfully
summarized for the jury. It is up to the defendant to cross-examine the testimony and for the trial
judge to insure that it does not unduly prejudice the fairness of the proceedings.
C.
The Expert Witness.
In Tarwater which we discussed above,1658 the defendant claimed that, although he received
some payments, those payments were not income to him because he was merely a conduit for
transferring those payments to a third party (Davis). At trial, the Government used two IRS agents
(Jackson and Barton) to summarize the paper trail of deposits of the payments into the defendants
bank accounts, the amounts by checks written to the third party and cash withdrawals. After going
through the details, the Agents testified in summary:
For each of the relevant tax years, Jackson reviewed both the monies
deposited into as well as the monies drawn out of each of Tarwaters bank accounts.
Jackson found that, for each year, Tarwater deposited a great deal more of the
monies allegedly intended for Davis than he paid out through checks written to
Davis. Even when Jackson added Tarwaters cash withdrawals and cash taken out
of deposits to the checks written to Davis, giving Tarwater the benefit of an
assumption that the cash was sent to Davis, Jackson still found that the monies taken
in for Davis exceeded the monies sent out to Davis. According to Jackson, the excess
of monies taken in for Davis over monies distributed out to Davis should have been
retained in Tarwaters accounts if those monies were, in fact, meant as income for
Davis. Tarwaters monthly ending bank balances demonstrated, however, that
Tarwater did not retain the undistributed monies intended for Davis but, instead,
spent those monies.
The governments expert witness, Barton, opined that Tarwater did not state
the true amount of either his gross receipts or his net income for the years 1992
through 1994. Specifically, as to income, she said that: (1) in 1992, Tarwater
understated his income by $52,233; (2) in 1993, he understated his income by
$35,950; and (3) in 1994, he understated his income by $120,945. In 1992,
Tarwaters understatement of income was in part explained by his failure to report
over $30,000 in gross receipts for the eight months that he operated as a sole
proprietorship. Barton explained that a correct report of gross receipts and income
is necessary to a correct computation of tax liability and that a false report of income
is capable of influencing the IRS in the audit of tax returns.
Tarwater objected to Bartons testimony. The Court approved the testimony, addressing
Tarwaters objections as follows:
1658
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V. EVIDENTIARY ISSUES
A.
Tarwater argues that the district court should not have admitted Agent
Bartons expert opinion testimony that Tarwater under-reported his income.
According to Tarwater, Bartons opinion was unreliable because it was based upon
facts or assumptions about which she had no knowledge, let alone the specialized
knowledge required by Rule 702. Def.s Br. at 41. Tarwater suggests that the
magistrate judge who conducted the Daubert hearing focused on Bartons
qualifications and expressly abandoned the gate keeping function of Daubert. Id.
We review a district courts decision to admit expert testimony for abuse of
discretion. United States v. Langan, 263 F.3d 613, 620 (6th Cir. 2001).
The magistrate judge held a Daubert hearing on January 18, 2001. Based on
the evidence and argument presented, the judge ruled that Bartons testimony was
both relevant and reliable pursuant to Rule 702, Federal Rules of Evidence, and
should be admissible at trial. J.A. at 187. In particular, the magistrate judge found
that it was clear from the evidence presented during the Daubert hearing that Ms.
Barton is qualified to express an expert opinion on whether defendant understated
his taxable income for the years 1991-1994. J.A. at 179. In concluding its
twenty-five page memorandum and order, the court wrote:
Ms. Barton is a qualified expert in her field who possesses
technical knowledge that will assist the trier of fact to understand and
determine the issues in this case. Her testimony is based upon
sufficient facts and/or data, the testimony is the product of reliable
principles and methods, and it appears that Ms. Barton has applied
the principles and methods reliably to the facts of this case.
J.A. at 187. After reviewing the magistrate judges memorandum and order, the
transcript of the Daubert hearing, and the pleadings filed by the parties, the district
court overruled Tarwaters objections and appeal of the magistrate judges ruling on
the admissibility of Bartons opinions. J.A. at 210-213.
In Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. 579 (1993), the
Supreme Court held that Federal Rule of Evidence 702 requires district courts to
ensure that an experts scientific testimony both rests on a reliable foundation and
is relevant to the task at hand. Daubert, 509 U.S. at 597. The Court suggested a
non-exclusive list of factors for courts to consider when deciding whether proposed
scientific expert testimony is sufficiently reliable. Such factors include: (1)
whether a theory or technique has been or can be tested; (2) whether the theory or
technique has been subjected to peer review and publication; (3) the known or
potential rate of error; and (4) whether the technique has been accepted by a relevant
scientific community. Daubert, 509 U.S. at 593-594.
- 729 -
In Kumho Tire Co. v. Carmichael, 526 U.S. 137 (1999), the Court extended
Daubert to include any expert testimony based on technical and other specialized
knowledge. Kumho Tire Co., 526 U.S. at 152. With respect to the individual
factors enumerated in Daubert, the Kumho Court held that, while trial courts may
consider such factors when assessing the reliability of all types of expert testimony,
Dauberts list of specific factors neither necessarily nor exclusively applies to all
experts or in every case. Kumho, 526 U.S. at 141. Whether Dauberts specific
factors are, or are not, reasonable measures of reliability in a particular case is a
matter that the law grants the trial judge broad latitude to determine. Kumho, 526
U.S. at 153.
After reviewing Bartons trial testimony, we cannot say that the district court
abused its discretion by allowing her to testify as an expert witness. We find no
merit to Tarwaters argument that the district court abandoned its Daubert
gate-keeping function by failing to consider the Daubert factors. To be sure, the
court concluded -- and we agree -- that the Daubert factors were of limited value
here, but the court nonetheless carefully considered whether Bartons testimony was
reliable and relevant. The court summarized its findings as follows:
Ms. Bartons testimony is the product of well-established
principles of bookkeeping and accounting as those areas of expertise
are applied to the Internal Revenue Code. Ms. Barton demonstrated
an understanding of the rules and regulations of the IRS Code that
require the reporting of all taxable income. The methods employed
by Ms. Barton in reaching her expert opinion were the application of
her education, training, knowledge and experience to analyze
defendants tax returns and business records to determine whether the
defendant complied with the requirements of the Internal Revenue
Code to report all his income.
J.A. at 182. Given such findings, we are confident that the district court had an
adequate basis for concluding that Bartons testimony was both reliable and relevant.
Moreover, we reject Tarwaters assertion that Bartons testimony was
unreliable because based upon facts or assumptions about which she had no
knowledge. Def.s Br. at 41. Indeed, the record refutes any such assertion. As
stated by the district court:
Ms. Barton testified that her computations were based upon
Defendants bank records and business records, and her expert
opinion that Defendant under reported his income is based upon her
examination of Defendants record, her ability to trace the flow of
income and the disbursement of same as viewed by a Revenue Agent
- 730 -
with twenty-five years of experience and training, and from her

analysis of Defendants bank records and business records. It appears
to the Court that Ms. Barton has applied the principles and methods
of her technical expertise to the facts of this case.
J.A. at 183. At trial, Barton reiterated that her opinions were based upon her review
of Tarwaters records -- books, bank statements, and checks -- and tax returns.
Tarwaters suggestion that Bartons opinion involved a determination of the
credibility of two non-testifying taxpayers is without merit.
In United States v. Mikutowicz,1659 the taxpayer had an S Corporation which, at his direction,
made payments to offshore entities that he owned and deducted those payments. No services were
rendered for the payments. Hence, as a matter of tax law, the payments would not be deductible.
Mikutowicz was indicted for tax conspiracy, tax perjury and tax evasion.1660 Mikutowicz was
convicted on all counts. On appeal, he contested, inter alia, certain matters related to the IRSs
expert witness. The court discussed and resolved the points as follows (certain citations and a
footnote omitted for readability):
B. Expert Testimony on Ordinary and Necessary Business Expenses
Mikutowicz next challenges the testimony of the government's tax
computation expert, Michael Pleshaw. Pleshaw, an Internal Revenue Service
(IRS) agent, explained to the jury the basis for the IRS's conclusion that deductions
claimed by Mikutowicz and his companies were improper. Mikutowicz challenges
the admission of Pleshaw's testimony concerning the non-deductibility of AGM's
payments to Ellis Engineering. We review the admission of Pleshaw's testimony
for an abuse of discretion.
Pleshaw provided the jury with a summary of why the IRS determined that
the deductions claimed by Mikutowicz and his companies were improper. It is well
established in several circuits that expert testimony by an IRS agent which
expresses an opinion as to the proper tax consequences of a transaction is admissible
evidence. The primary limitation on this type of evidence is that the agent may not
testify about the defendant's state of mind when the challenged deductions were
claimed. See Fed. R. Evid. 704(b) (expert may not testify to mental state of
defendant where mental state is element of charged offense); Sabino, 274 F.3d at
1067 (In a tax case, the summary witness is allowed to summarize and analyze the
facts indicating willful tax evasion so long as the witness does not directly embrace
the ultimate question of whether the defendant did in fact intend to evade income
1659
365 F.3d 65 (1st Cir. 2004).

1660
It is not clear from the court of appeals recitation of the indictment as to the returns
to which these various counts relate. That, however, is not relevant to the points discussed in the
text above.
- 731 -
taxes.) (internal quotations and citations omitted); Windfelder, 790 F.2d at 582
(stating that it was error, in tax fraud case, to admit IRS agent's testimony that
defendant intentionally understated his income because this testimony
impermissibly stated an opinion as to the defendant's knowledge or willfulness, a
mental state which constitutes an element of the crimes charged); see also United
States v. Valle, 72 F.3d 210, 216 (1st Cir. 1995) (Rule 704(b) prohibits all direct
expert testimony concerning a criminal defendant's intent, regardless of the witness's
field of expertise, so long as intent is an element of the crime charged.)
.
Pleshaw's testimony adhered to these standards. He described the IRS's audit
of Mikutowicz and his businesses and the results of the audit. In addition, he
testified to the rationale which led the IRS to reach its conclusions. Pleshaw offered
no testimony concerning Mikutowicz's state of mind when claiming the challenged
deductions. There was no abuse of discretion in the admission of Pleshaw's
testimony.
Mikutowicz also asserts that the district court violated his rights under the
Confrontation Clause of the Sixth Amendment by limiting his cross-examination of
Pleshaw. The court refused to let Mikutowicz question Pleshaw about various
judicial opinions, which Mikutowicz claims would have established that the
deductions were properly taken.
A defendant is entitled to cross-examine a government witness to test the
truth of his testimony. But the court retains wide latitude to impose reasonable
limits on cross-examination in order to avoid confusion of the issues or extended
discussion of marginally relevant material. Id. (internal quotations and citations
omitted). Defendants cannot run roughshod, doing precisely as they please simply
because cross-examination is underway. United States v. Boylan, 898 F.2d 230,
254 (1st Cir. 1990). We review this challenge de novo to determine whether defense
counsel was afforded a reasonable opportunity to impeach adverse witnesses. See
United States v. Balsam, 203 F.3d 72, 87 (1st Cir. 2000). Should that threshold be
reached, any restrictions that were placed on the extent and manner of the
cross-examination will be reviewed for abuse of discretion. Id.
Pleshaw was not qualified as an expert on tax law. As the IRS agent who
audited Mikutowicz and his businesses, Pleshaw provided detailed testimony on the
process used to conduct the audit, the conclusions reached, and the computations
made to arrive at Mikutowicz's tax deficiency. The government attempted to elicit
from Pleshaw neither an opinion on the precise meaning of terms used in the Internal
Revenue Code nor a discussion of legal sources that could bear on such an
interpretation, as well it should not have. Expert testimony proffered solely to
establish the meaning of a law is presumptively improper. United States v.
Prigmore, 243 F.3d 1, 18 n.3 (1st Cir. 2001); see Nieves-Villanueva v. Soto-Rivera,
- 732 -
133 F.3d 92, 99-101 (1st Cir. 1997) (ruling that it was error to admit expert
testimony explaining the holdings of various Puerto Rico Supreme Court opinions).
Yet, this is precisely what Mikutowicz sought to do. Even though Pleshaw
is not a lawyer and did not mention the United States Tax Court on direct
examination, defense counsel attempted to question Pleshaw about three Tax Court
opinions from the early 1980's. Even a tax lawyer would have found it difficult to
respond intelligently to questions about the precise facts and holdings of several
twenty-year old Tax Court cases and then apply those holdings to the facts of the
instant case, without having had a prior opportunity to prepare. Had the
cross-examination proceeded as Mikutowicz proposed, it would have involved
defense counsel reading excerpts of the cases to the jury, without the jury having a
context for evaluating the import of the information that it was receiving. See Curtis,
782 F.2d at 600 (The jury is not comprised of lawyers . . . To attempt to explain the
myriad rules of judicial construction, the complexity of legal principles, or the
function of precedent would hopelessly divert the jury from their preeminent duty
of assessing . . . guilt.). The district court was well within its discretion in
concluding that such an examination would have exceeded the scope of the direct
examination and confused the jury. See United States v. Ingredient Technology
Corp., 698 F.2d 88, 97 (2d Cir. 1983); Benjamin A. Vernia, Annotation,
Admissibility of Expert Testimony Regarding Questions of Domestic Law, 66
A.L.R. 5th 135 (1999) (noting that the bases for the rule against an expert explaining
the law to the jury relate to jury confusion). n4
n4 Equally important, it would have usurped the judge's role. In our legal system,
purely legal questions and instructions to the jury on the law to be applied . . . [are]
exclusively the domain of the judge. Nieves-Villanueva, 133 F.3d at 99. Thus, it
was the judge's role alone to instruct the jury on the law necessary for determining
whether the challenged deductions were properly claimed as ordinary and necessary
business expenses.
Do you think there is some logical inconsistency in the courts discussion. Focus first on the courts
early blessing of the agents summary of why the IRS determined that the deductions claimed by
Mikutowicz and his companies were improper; the court justified that testimony on the basis that
expert IRS witnesses can testify as to the proper tax consequences of transactions. Isnt that
testimony as to the law? Specifically, in the testifying that the amounts in question were not
ordinary and necessary business expenses, the agent would have to be applying the law as he
understood it and would have to be telling the jury to trust him as an expert on that issue. But, just
a short term later in the discussion, in justifying limiting the cross-examination, the court says that
the agent had not been qualified as an expert on tax law. Is it consistent that he was and had been
qualified to testify as to the legal test for ordinary and necessary when putting on the prosecution
case but was not qualified when the defendant wanted to test his expertise on the tax law? I am not
- 733 -
sure it is consistent, but I think that most trial courts and appellate courts would reach the same
result in similar cases. Why?
VI.
404(b) Evidence.
Tax crimes require that the defendant act willfully which means, as interpreted, that the
defendant must have intentionally violated an objectively knowable and subjectively known legal
duty. Focusing on the latter, the Government must prove specific intent. Intent is rarely directly
provable, but is proved by circumstantial evidence.
It is not uncommon for the Government to seek to prove the defendants willfulness (or
intent) by reference to uncharged crimes or bad conduct. The Government is not allowed to prove
character or a character trait of a defendant to prove action in conformity with the character or trait,
unless the defendant introduces such evidence in his or her defense. FRE 404(a). However, the
Government may introduce evidence of other crimes, wrongs, or acts for purposes other than
showing character or character trait; thus, it may be admitted to show intent, knowledge,
absence of mistake or accident, etc. FRE 404(b). This type of evidence is often called uncharged
crimes, other crimes, or bad acts evidence. In this section, I generally refer to this type of
evidence as bad acts evidence. Because the bad acts evidence shows the defendant in a bad light,
it will further prejudice the defendant in the jurys mind even apart from its persuasiveness as to the
charged crimes in the case. Bad acts evidence avoids 404(b)s limitations altogether if the conduct
is inextricably intertwined with or intrinsic to the charged conduct, because the Government is
permitted to tell the whole story of the charged conduct.1661 This threshold avoidance of 404(b) can
be particularly damaging to a defendant charged in an overarching conspiracy where a number of
the potential overt acts or even just related acts are not separately charged.
The difference between impermissible 404(a) bad acts evidence from which to infer guilt and
404(b) permissible bad acts evidence may be conceptualized as follows:
Although the distinction between acts offered to prove propensity and acts offered
for another purpose is not easily drawn, it is helpful to consider whether the
factfinder is asked to infer from behavior on one occasion something about the nature
of a person and then to infer from that how the person probably would have behaved
on another occasion, when the only connection between the two occasions is that the
factfinder believes that people of a certain type would act the same way both times.
If so, then the evidence is character evidence. If the factfinder can reason from one
1661
E.g. United States v. Tarwater, 308 F.3d 494, 517 (6th Cir. 2002), rehearing and
rehearing en banc denied, citing United States v. Everett, 270 F.3d 986, 992 (6th Cir. 2001); and
United States v Hilgeford, 7 F.3d 1340 (7th Cir. 1993). See also Notes of the Advisory Committee
to the 1991Amendment to Rule 404(b), citing United States v. Williams, 900 F.2d 823 (5th Cir.
1990).
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act about another without going through the first step, the evidence is not character
evidence. 1662
In laymans terms, the concept is captured in the following Fifth Circuit Pattern Jury
Instruction:
You have heard evidence of acts of the defendant which may be similar to
those charged in the indictment, but which were committed on other occasions. You
must not consider any of this evidence in deciding if the defendant committed the
acts charged in the indictment. However, you may consider this evidence for other,
very limited, purposes.
If you find beyond a reasonable doubt from other evidence in this case that
the defendant did commit the acts charged in the indictment, then you may consider
evidence of the similar acts allegedly committed on other occasions to determine:
Whether the defendant had the state of mind or intent necessary to commit the crime
charged in the indictment;
or
whether the defendant had a motive or the opportunity to commit the acts charged
in the indictment;
or
whether the defendant acted according to a plan or in preparation for commission of
a crime;
or
whether the defendant committed the acts for which he is on trial by accident or
mistake.
These are the limited purposes for which any evidence of other similar acts may be
considered.1663
The Government can use the bad acts evidence with a level of proof that is significantly
below the level required if the indictment had charged the conduct. Huddleston v. United States,
1662
Stephen A. Saltzburg, Daniel J Capra, and Michael M. Martin, Commentary on Rule

404, LEXIS-NEXIS Federal Criminal Laws and Rules Selected Federal Court Rules (CD Rom
Edition (Current as of March 22, 2007.
1663
- 735 -
485 U.S. 681 (1988) (rejecting an argument that the judge make a preliminary finding of the bad act
by a preponderance of the evidence and requiring only that the judge determine that the
Governments evidence is sufficient to permit the jury to reasonably conclude by a preponderance
of the evidence that the defendant committed the alleged bad act). Thus, the jury does not have to
find the defendant guilty of the bad act(s) beyond a reasonable doubt. At least in theory, this
means that, if the Government did not charge the bad act(s) because it realized it could not meet
that level of proof for that conduct, it might still use evidence of the conduct to convince the fact
finder to find guilt on charged conduct. That is counter-intuitive, and points out the dangers in
404(b) evidence.
Because of its risk of prejudice, courts require that the inference the prosecution seeks from
the bad acts be an inference that is really in issue. For example, where this usually arises in tax
cases is with respect to the willfulness or intent element of the crime. In this context, the
Government will only be allowed to introduce the evidence if the defendant is contesting
willfulness.1664 Since the Rule requires that, upon request, the prosecution must notify the defendant
of such evidence, that request is routinely made in criminal cases and, sometimes even when not
requested, simply required by the Court as part of a comprehensive pretrial scheduling plan that sets
forth dates for such notice and dates for pretrial motions in limine as to the admissibility of the
evidence. Conceivably, the defendant might pre-empt the issue by conceding willfulness, but in
most cases the defendant may not be willing to do that because that is his or her only viable defense.
So the defendant must look to mitigate the damage by challenging the logical nexus between the
evidence and the allegation of intent which it is supposed to prove and by obtaining a favorable
limiting instruction.
The trial judge serves a gate-keeping function for 404(b) evidence to insure that the evidence
is relevant to the limited inferences permitted by Rule 404(b) and the permitted inference is not
substantially outweighed by the danger of unfair prejudice, confusion of the issues, or misleading
the jury, or by considerations of undue delay, waste of time, or needless presentation of cumulative
evidence. Rule 403. Different circuits articulate the gate-keeping function slightly differently. For
example, the Third Circuit recently reaffirmed the trial courts important gate-keeping function by
making the following inquiries with respect to such proffered evidence:
(1) the evidence must have a proper purpose; (2) it must be relevant; (3) its probative
value must outweigh its potential for unfair prejudice; and (4) the court must charge
the jury to consider the evidence only for the limited purposes for which it is
admitted.1665
And, appellate courts review of the admission of such evidence is heightened.1666 United States v.
Miller, 520 F.3d 504, 511-512 (5th Cir. 2008) (noting also that appellate review of 404(b) evidence
is heightened), but the same concerns of relevance and undue prejudice animate the discussion.
1664
1665
1666
E.g., United States v. Bok, 157 F.3d 157 (2d Cir. 1998).
United States v. Daraio, 445 F.3d 253, 264 (3d Cir. 2006).
United States v. Miller, 520 F.3d 504, 511-512 (5th Cir. 2008).
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Consider the following example of bad acts evidence in a tax case:

United States v. Johnson, 634 F.2d 735 (4th Cir. 1980)
Johnson is a medical doctor, who inherited her practice from her deceased
brother. She filed tax returns for 1972, 1973, and 1974, which understated her
income by approximately $120,000.00 and her tax liability by approximately
$31,000.00. Her defense at trial was inadvertence: she had had nothing to do with
preparing her tax returns because she cared nothing for money and chose, instead,
to devote her time to the demanding personal needs of her patients. To support this
defense she produced seven local witnesses three physicians, a school board
member, a public school teacher, a mortician, and a minister who testified to her
truthfulness, honesty, and compassion, and to the busy nature of her practice.
In attempted rebuttal of this portrait of Johnson as an altruistic healer of the
sick, whose concerns lay elsewhere than attending to her financial interests and
resulting legal responsibilities, the government called Robert Pemberton, an auditor
for the U.S. Department of Health, Education & Welfare. Pemberton testified at
length about his investigation of Johnson's billings for Medicaid services for
1976-78. His study showed that Johnson reported four times as many services per
patient as other Virginia doctors. Johnson did not object to the general course of
Pemberton's testimony. In fact, the following day Johnson again took the stand in
order to testify that she had not signed the Medicaid billings upon which Pemberton
had based his investigation. During cross-examination, government counsel asked
Johnson, Who would have received the benefit of all the fraudulent forms for
Medicaid that were filed? Johnson's counsel objected and moved for a mistrial
because use of the term, fraudulent, unduly prejudiced the jury. The trial judge
overruled the motion, directed government counsel to rephrase the question, and
gave the jury a cautionary instruction.
II
We hold that Pemberton's testimony was admissible under Fed.R.Evid.
404(b), which provides:
Evidence of other crimes, wrongs, or acts is not admissible to prove the
character of a person in order to show that he acted in conformity therewith.
It may, however, be admissible for other purposes, such as proof of motive,
opportunity, intent, preparation, plan, knowledge, identity, or absence of
mistake or accident.1667
1667
The latter sentence now concludes with a procedural requirement that, upon request,
the prosecution notify the defendant of the 404(b) evidence it intends to use.
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The first sentence of Rule 404(b) brings forward the traditional rule that
extrinsic acts evidence is inadmissible solely to prove that defendant is a bad
character and, therefore, likely to have committed the crime charged. Extrinsic acts
evidence, however, may be admissible for other purposes including those listed in
Rule 404(b). The Rule's list is merely illustrative, not exclusive.
Rule 404(b) of course commits to trial judge discretion the determination
whether extrinsic act evidence shall be admitted under its second sentence. In
exercising that discretion the judge first must determine if the proffered evidence is
relevant to an issue other than the accused's character. If so, then the trial judge must
balance the evidence's probative value against the dangers of undue prejudice
aroused by this form of evidence. This may conceitedly pose particularly difficult
problems. The Advisory Committee Notes to Rule 404(b) state:
No mechanical solution is offered. The determination must be made whether
the danger of undue prejudice outweighs the probative value of the
availability of other means of proof and other factors appropriate for making
decisions of this kind under Rule 403 (confusion of issues, misleading the
jury, undue delay, waste of time, and needless presentation of cumulative
evidence).
Within this general guideline for the exercise of trial court discretion, we
think the evidence here challenged was properly admitted. The general prohibition
contained in the first sentence of Rule 404(b) is designed to prevent prosecutorial
overreaching by a means whose obvious effectiveness has made it an inescapable
temptation for advocates over the years. The second sentence, however, reflects the
perception that evidence of other acts may sometimes be critical to proof on a
dispositive issue related to a defendant's state of mind. The ambivalence reflected
in the Rule but serves to emphasize the particular delicacy of the discretionary
rulings its administration may require. There is no gainsaying that the ruling here
posed just such a problem for the trial judge, but we think he properly resolved it.
Particularly where, as here, a defendant in a criminal case by her own
testimony and that of others has deliberately sought as the primary means of defense
to depict herself as one whose essential philosophy and habitual conduct in life is
completely at odds with the possession of a state of mind requisite to guilt of the
offense charged, that defendant may be considered in effect to have forfeited any
protection that the first sentence of the Rule might otherwise have provided against
the type of other act evidence here challenged. See Walder v. United States, 347
U.S. 62, 74 S. Ct. 354, 98 L. Ed. 503 (1954). In such circumstances, testimony such
as that of Pemberton may well be the only effective way to rebut evidence designed
generally to plant in the jury's mind a reasonable doubt that such a person could have
possessed the culpability of mind requisite to convict of the crime charged.
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Balancing the probative value of the challenged evidence against its potential for
unfairly prejudicing the defendant, and on the latter point taking into account that the
defendant deliberately chose to base her defense upon evidence not otherwise
effectively rebuttable, we conclude that the district judge's admission of Pemberton's
evidence lay well within the bounds of the discretion reposed in him.
III
We think that government counsel's unfortunate reference to fraudulent
Medicaid forms was sufficiently corrected by the trial judge's cautionary actions so
that the risk of prejudice was adequately removed.
As noted in Johnson, the Governments 404(b) evidence, if otherwise proper, is still subject
to exclusion if its probative value is substantially outweighed by the danger of unfair prejudice,
confusion of the issues, or misleading the jury, or by considerations of undue delay, waste of time,
or needless presentation of cumulative evidence. FRE 403.
VII.
Other Proof Issues.

A.
Presumptions and Related Matters.
Presumptions that meet or lighten the burden that the Government prove each element of the
offense beyond a reasonable doubt are a problem in the criminal law.1668 In criminal cases,
conclusive presumptions of fact are generally not allowed i.e., a presumption that proof of fact X,
not an element of the offense, conclusively establishes fact Y, an element of the offense.
Presumptions are encountered throughout the law.1669 In a criminal case, however, the Supreme
Court has cautioned that a presumption may not pass constitutional muster if it undermines the fact
finder's responsibility to determine the existence of the essential elements of a crime beyond a
reasonable doubt.1670 Hence, a mandatory presumption will pass muster only if rational and reliable
1668
For a good survey of the range of problems created by presumptions, see Kevin W.
Robinson, Thirty-First Annual Review of Criminal Procedure: III. Trial: Proof Issues, 90 Geo. L.J.
1740, 1747-1751 (2002). Note that this survey discussion is updated annually in the Georgetown
Law Journal so the most recent survey should be consulted.
1669
There is some potential for confusion in analysis in this area, however. If the law
establishes Y as the element of the offense and establishes that X establishes Y, it can be said that
the real element of the offense is X and therefore proof of X establishes the element of the offense,
as to which Y is not technically relevant. Where it is clear that Congress intended that result, then
the analysis should apply. Where, however, as in the case of most presumptions arising from
general considerations not uniquely addressed to the element of the offense, the issue is whether a
presumption rule of general application is a change of the element of the offense or applies in other
ways. We deal here with the latter situation.
1670
County Court v. Allen, 442 U.S. 140, 156 (1979).
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on its face; a permissive presumption (permitting the finding but not requiring it) must be rationally
and reliably related to the presumed fact.1671
Lets start analysis with a common presumption in civil cases the mailing presumption.
Proof of the fact that a document is deposited in the U.S. mail properly addressed and postmarked
gives rise to a presumption that the addressee received the document via the mail. That presumption
permits (but does not necessarily require) the trier of fact to conclude that the addressee received
the document and effectively shifts the burden of proof or at least a burden of production from the
party bearing the burden of persuasion on the fact of receipt to the opposing party.
How do presumptions apply in criminal cases where there is a constitutionally mandated
requirement that the Government prove each element of the offense beyond a reasonable doubt?
Lets look at the requirement that the Government prove the taxpayers signature on a return for a
tax evasion case involving a false return or a false return case under 7206(2). The Government
must prove that the defendant signed the return. This is usually done through some actual evidence
a person familiar with the defendants handwriting identifies the signature on the return or a
handwriting expert using exemplars or some other control signatures from the defendant identifies
the handwriting on the return.
The Code, however, creates a presumption that a taxpayers signature on the return is
authentic.1672 Can the Government use this signature authenticity presumption to, in effect, meet its
burden and/or shift the burden of persuasion or production on the issue to the defendant so as to
potentiality require the defendant to waive his Fifth Amendment privilege in order to rebut the
presumption? In United States v. Kim, 884 F.2d 189 (5th Cir. 1989), the Fifth Circuit moved easily,
perhaps too easily, to an affirmative answer. In Kim, the defendant complained of the following
instruction:
Now, let me tell you this about the signatures on the bottom of those tax
returns. The fact that an individual's name is signed to a return is prima facie
evidence for all purposes that the return, statement or other document was actually
signed by him or her.
In other words, you may consider if their signature is on the return, that they
signed it, unless there is proof that they did not.
And we talk about the language describing something. That simply means
signing one's name to a document. And the law does not even require that the
defendant personally sign the tax return.
If you find sufficient circumstances present indicating that the defendant or
defendants authorized the filing of the return with his or her name signed to it, that's
1671
A rational connection exists if it is more likely than not that the presumed fact flows
from the proven facts. County Court v. Allen, supra, at p. 165.
1672
Section 6064 provides that [t]he fact that an individual's name is signed to a return,
statement, or other document shall be prima facie evidence for all purposes that the return,
statement, or other document was actually signed by him.
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enough for you to find that he or she made and subscribed the tax return for all
purposes.
The Fifth Circuit sustained the application of 6064 as follows:
Mrs. Kim argues that the presumption contained in 26 U.S.C. 6064 is
unconstitutional, because it relieves the government of its obligation to prove its case
beyond a reasonable doubt. Section 6064 provides:
The fact that an individual's name is signed to a return, statement, or other
document shall be prima facie evidence for all purposes that the return,
statement, or other document was actually signed by him.
26 U.S.C.A. 6064 (West 1989). The jury essentially was instructed that the
signatures gave rise to a mandatory presumption, i.e., that they must find an
ultimate fact on proof of a basic fact, unless the defendants present evidence to
rebut the connection between the two. See County Court of Ulster County v. Allen,
442 U.S. 140 (1979). The constitutionality of a statute setting forth a mandatory
presumption depends on the rationality of the connection between the facts proved
and the ultimate fact presumed. United States v. Gainey, 380 U.S. 63, 66 (1965).
A presumption of this type will be regarded as irrational unless it can at least be said
with substantial assurance that the presumed fact is more likely than not to flow from
the proved fact on which it is made to depend. Leary v. United States, 395 U.S. 6,
36 (1969). There is little doubt that a person may rationally be presumed to have
signed his name, when the name of that person has been signed to a return. The
connection between the proved and presumed fact therefore shows no constitutional
defect.1673
This raises an interesting issue because the instruction sustained appears to create an
irrebuttable presumption which, as I read the Fifth Circuits language, it would not sustain. Perhaps
Mrs. Kim did not have any evidence rebutting the presumption and thus it was irrebuttable.1674 In
most cases, this is probably not an issue. The evidence will often establish in other ways that the
signature is the defendants. The defendant may stipulate his signature is authentic or, if the
defendant testifies, admit it is authentic. Or, a witness may identify the signature as the defendants.
Still, I think Kim is troubling because the statute on its face does create what is an irrebuttable
presumption that relieves the Government of a key component of an element of the offense.
1673
884 F.2d at p. 195 (parallel citations omitted for readability).

At least one author views the appellate decision in Kim as treating the presumption
as irrebuttable. Kevin W. Robinson, Thirty-First Annual Review of Criminal Procedure: III. Trial:
Proof Issues, 90 Geo. L.J. 1740, 1747-1749 n. 1978 (2002). See also United States v. Anderson, 353
F.3d 490 (6th Cir. 2003) (referring to the presumption as rebuttable and concluding that, in
conjunction with the Governments limited and uncertain testimony, the 6064 presumption met
the sufficiency of the evidence appellate standard on the issue).
1674
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Now, I turn to another issue of the Government use of a presumption to prove a tax due
(which I shorten here to just tax due), one of the elements of a tax crime. Can the IRS prove the
tax due and owing simply by introducing an IRS certificate of assessment? In United States v.
Silkman,1675 the IRS assessed tax that had not been reported by the taxpayer, and the taxpayer took
various actions to avoid payment. The taxpayer was indicted for evasion of payment. The
Governments proof of tax due consisted of the March 1991 notice of deficiency plus five
certificates evidencing the September 1991 assessments and, [a]t the governments urging, the
district court excluded defense evidence offered to prove that Silkman in fact had no taxable income
for the tax years in question. The court then instructed the jury that the tax assessment for each
year establishes the tax liability. The taxpayer was convicted and appealed.
The court of appeals framed the issue one of first impression as whether an IRS tax
assessment that is administratively final for purposes of the agencys civil collection remedies is also
conclusive proof of the tax deficiency in a tax evasion prosecution. The Court said:
Here, the IRS assessments were offered as conclusive proof of an underlying fact
that is an element of the crime -- that taxes were in fact owed. In this type of case,
the overriding principle is that one charged with the commission of a felony . . . has
an absolute right to a jury determination upon all essential elements of the offense.
****
The government has no authority for its startling contention that an IRS
assessment is conclusive proof in a criminal trial that taxes were in fact owing.
[Discussion of cases omitted]
We agree with the analysis in Voorhies -- a formal tax assessment that has
become administratively final is prima facie evidence of the asserted tax deficiency,
and if unchallenged, it may suffice to prove this element of the crime. But the
assessment is only prima facie proof of a deficiency. The assessed deficiency may
be challenged by the defendant accused of tax evasion, and the issue is one for the
jury. As the Supreme Court said in United States v. Martin Linen Supply Co., 430
U.S. 564, 572-73 * * * (1977), the jurys
overriding responsibility is to stand between the accused and a potentially
arbitrary or abusive government that is in command of the criminal sanction.
For this reason, a trial judge is prohibited from entering a judgment of
conviction or directing a jury to come forward with such a verdict, regardless
of how overwhelmingly the evidence may point in that direction.
(Citations omitted.) This conclusion is consistent with United States v. England,
where the government conceded that proof of a valid assessment was essential to its
evasion case, and the court held it was error to instruct the jury the assessment was
1675
156 F.3d 833 (8th Cir. 1998).
- 742 -
valid as a matter of law. 347 F.2d at 430. England was followed in United States v.
Goetz, 746 F.2d 705, 708-10 (11th Cir. 1984). Our conclusion is also consistent with
decisions that the taxpayer may defend a charge of willfully evading the assessment
of taxes by proving there was no tax due and owing, for example, by evidence of
unclaimed deductions and expenses. See, e.g., Clark v. United States, 211 F.2d 100,
103 (8th Cir. 1954); see also Sansone, 380 U.S. at 354 (the crime of tax evasion is
complete when a false return is filed assuming, of course, that there was in fact a
deficiency).
We find further support for this conclusion in the Supreme Courts cases
dealing with the validity of presumptions in criminal cases. The government argues,
in effect, that the alleged tax deficiency may be conclusively presumed from an
administratively final assessment. But conclusive presumptions are invalid in
criminal cases because they conflict with the overriding presumption of innocence
with which the law endows the accused and which extends to every element of the
crime, and would invade the fact-finding function which in a criminal case the law
assigns solely to the jury. Sandstrom v. Montana, 442 U.S. 510, 523 * * * (1979)
(quotations omitted). The courts approach in Voorhies, on the other hand, creates
in effect only a permissive presumption, one that merely allows an inference to be
drawn and is constitutional so long as the inference would not be irrational. Yates
v. Evatt, 500 U.S. 391, 402 n.7* * * (1991). It is rational to infer that an assessment
which the taxpayer chose not to contest is prima facie evidence of the asserted
deficiency. But it is not rational to make the assessment conclusive proof of the
deficiency, particularly because in the absence of a tax return an assessment is based
upon a substitute return prepared by the IRS without the benefit of factual input
from the taxpayer.
For the foregoing reasons, we conclude that one accused of tax evasion must
have the opportunity to prove, however unlikely the proposition may be, that an
administratively final tax assessment does not accurately reflect the existence of a
tax deficiency. Therefore, Silkman is entitled to a new trial at which he may
introduce evidence relevant to whether there was in fact a tax deficiency in one or
more of the tax years in question.
Silkman raises three additional issues on appeal that require little discussion.
First, he argues he is entitled to a judgment of acquittal because the government
failed to prove tax deficiencies. We disagree. The formal assessments were prima
facie evidence of tax deficiencies. When combined with the other evidence that
Silkman consciously refused to file returns, ignored numerous IRS inquiries,
evasively responded to the notice of deficiency, and then purposefully concealed his
assets overseas, we think the trial record was more than sufficient to permit the jury
to find tax deficiencies and the other elements of tax evasion beyond a reasonable
doubt.
- 743 -
****
Upon remand Silkman was retried, convicted and the case went again on appeal with respect
to the same basic issue. The taxpayer claimed that the assessment were based upon his gross income
without allowing business expenses and other deductions which the Government knew or should
have known about. The Court then discussed the claim in Silkman II:1676
Silkman argues that this testimony rendered the government's evidence of a
deficiency insufficient as a matter of law because the IRS had access to additional
information from which it could have estimated his business expenses, such as his
tax returns from earlier years, and its failure to do so produced an admittedly
inaccurate assessment that is not prima facie evidence of a tax deficiency.
In the circumstances of this case, we disagree. When a taxpayer fails to file
a return and then refuses to provide relevant information to the IRS, the agency
faces a difficult task in determining, assessing, and collecting whatever tax may be
owed. It is not compelled to file a substitute return to trigger the assessment process.
See Geiselman v. United States, 961 F.2d 1, 5 (1st Cir.), cert. denied, 506 U.S. 891
(1992). Indeed, it is not even compelled to make a formal assessment when no return
is filed, because any deficiency is deemed to arise by operation of law on the date a
return should have been filed. See United States v. Dack, 747 F.2d 1172, 1174 (7th
Cir. 1984). But a substitute return provides a valid statutory basis for an assessment,
and an assessment gives the taxpayer notice of the IRS's position and an opportunity
to contest the assessed deficiency by administrative appeal and civil deficiency or
refund litigation. When the taxpayer declines to invoke these procedures, the
assessment becomes final for purposes of the IRS's civil tax collection remedies. And
when, as here, the taxpayer's other actions (such as transferring his assets abroad)
permit the jury to find willful tax evasion, it is entirely appropriate to consider the
unchallenged assessment prima facie evidence that some tax was owing, which is all
the government needs to prove to satisfy the tax deficiency element of this offense.
As we said in Silkman, 156 F.3d at 836, It is rational to infer that an assessment
which the taxpayer chose not to contest is prima facie evidence of the asserted
deficiency.
We therefore conclude that an unchallenged certificate of assessment is prima
facie evidence of a deficiency when a taxpayer who filed no return is charged with
tax evasion. That leaves the uncooperative taxpayer free to prove that no tax was in
fact owing, for example, because the substitute return wrongly estimated his income,
or because his business expenses and other deductions and exemptions exceeded that
income. The ultimate question of deficiency is then for the jury, which in this case
resolved that issue in the government's favor for one of the five tax years in question.
1676
United States v. Silkman, 220 F.3d 935 (8th Cir. 2000).
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As the trial evidence in total was sufficient to support the jury's verdict, the judgment
of the district court is affirmed.
So, via the certificate of assessment, per Silkman I and Silkman II, the Government at least
shifts a production burden and, if we read Silkman II literally, even a persuasion burden to the
defendant taxpayer. Is this correct? As the Court recognized, it is not the function of the assessment
in this circumstance to assert necessarily the correct tax liability. In such cases, tax assessments
represent only the IRSs belief that a tax is due and owing and the recording of an assessment
permitting the IRS to use its collection powers to collect the tax. Indeed, in this case, if the
taxpayers claim in Silkman II is correct that the IRS knew it was overstated, then how can that be
the basis for a tax due and owing an element of the crime the Government must prove beyond a
reasonable doubt. Shouldnt the Government have to show that the assessment was not only validly
made (i.e., with appropriate procedural regularity, which is historically the sole function of the
certificate of assessments), but that it properly reflected the underlying tax liability?
The Second Circuit in a recent case, United States v. Josephberg,1677 dealt with a facet of this
issue, relying in part on Silkman I. In Josephberg, in proving tax due for the evasion of payment
counts, the Government relied upon the following to meet its burden to prove tax due beyond a
reasonable doubt:1678 (i) a certificate of assessment; (ii) the underlying notices of deficiency, and (iii)
the Tax Court judgments (in the Tax Court, formally called decisions) after the taxpayer petitioned
with respect to the notices of deficiency. The Government apparently made no attempt to actually
prove anything else about the underlying tax due (no sticks, stones and mortar of income tax
liability, just the conclusions, if any proper ones, in the evidence cited). The Second Circuit divided
its discussion of this issue into two parts first, early in the opinion, the Second Circuit addressed
the sufficiency of the evidence on the tax due element of the crime and second, much later in the
opinion, the Court addressed the propriety of how the jury was instructed on the tax due element of
the crime. The discussions overlap, but I address them as addressed by the Second Circuit.
In addressing the sufficiency of the evidence, the Court moved handily and, in my judgment,
facilely to holding that the Governments evidence was sufficient to get to the jury on the issue
of tax due. This is quite troubling at several levels. First, as to the certificate of assessments as
proof of tax due, I have already discussed above the problems inherent in relying on such
certificates. Second, the additional evidence is hardly evidence or at least hardly evidence of
sufficient quality to permit a hypothetical reasonable juror to conclude beyond a reasonable doubt
that a tax is due. Certainly, a notice of deficiency is nothing more than the IRSs untested claims
of a tax due and not even admissible for the purposes of proving tax due in a civil case where the
issue is the tax due. Even the Tax Court judgments (really, decisions) are not the quality of evidence
that would permit a reasonable juror to conclude beyond a reasonable doubt that a tax is due. The
1677
United States v. Josephberg, 562 F.3d 478 (2d Cir. 2009), cert. den. 130 S.Ct. 397
(2009).
1678
The case also involved evasion of assessment for some years, but the discussion of
the issue of the use of the certificate of assessment apparently related only to the evasion of payment
counts.
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Second Circuit thought it solved the underlying problem by saying, in effect, that the Tax Courts
decisions had determined that there was a tax due. Even conceding that those default decisions had
resolved that matter of tax due for purposes of permitting the Tax Court to render its decisions, the
Tax Courts decisions did not and made no pretense of determining that the tax was due beyond a
reasonable doubt. All they determined was that the defendant in the Tax Court civil case had not
proved that the taxes were not due. The logical failure in the Second Circuits cryptic reasoning is
that it treats the Tax Courts decisions as merits decisions for establishing or at least as evidence
tending to establish an essential element of the crime upon which the Government has the burden
of proof beyond a reasonable doubt. It has never been the function of Tax Court decisions or any
other court judgments to bootstrap the determinations into holdings on issues in contexts requiring
the much higher burden of proof levels imposed upon the Government in criminal cases.1679 The
Second Circuit just glosses over the problems inherent in the Governments evidence.
In its later discussion of the jury instructions, the Second Circuit does offer a more nuanced
but ultimately erroneous discussion. The defendant had originally requested a jury instruction that
the certificate of assessments were only prima facie proof of a deficiency and is not conclusive
proof, or proof beyond a reasonable doubt. The court gave an instruction that the assessments by
the IRS constitute prima facie thats a Latin word which means []on its face[] constitute
sufficient evidence of the asserted tax deficiencies. The defendant then asked the court to clarify
the instruction by telling the jury that the assessments may be prima facie evidence, may constitute
evidence of the asserted tax deficiencies. The district court declined, and the defendant complained
on appeal that, without the clarification, the instruction given the jury created a conclusive
presumption that invaded the province of the jury. The Second Circuit rejected that complaint. The
Second Circuit noted, correctly, that the assessment could not be conclusive evidence of tax due
(citing Silkman I), but reasoned (consistent with Silkman I) that the assessments could be
considered prima facie evidence of tax due and that the may word the defendant requested was
equivocal and potentially more confusing to the jury than enlightening. Finally, adding may
before constitute evidence was not required because the instructions, in full context, did not create
a conclusive presumption. The Court then quoted the instructions in full context to state (1) that the
assessments were prima facie sufficient evidence of the tax deficiencies (see exact quote above), (2)
1679
By analogy, the Government routinely asserts and courts routinely hold that acquittals
on charges of tax evasion in the criminal case are neither preclusive nor even evidence of the
absence of fraud in an ensuing civil case where the Government must prove fraud only by clear and
convincing evidence. Helvering v. Mitchell, 303 US 391, 401 (1938). The key in these holdings
is the lower burden of proof the criminal verdict means only that the Government failed to proof
evasion beyond a reasonable doubt; that is different from a holding that that proof cannot be made
by clear and convincing evidence and thus that issue remains in play. The defendants acquittal of
evasion is not proof of no civil fraud nor is it even evidence of no civil fraud. In the situation
discussed in the text, the Tax Courts decisions merely establish that the defendant failed to prove
that the IRSs claims in the notices of deficiency were incorrect; it does not even come close to
proving that the IRSs claims were correct beyond a reasonable doubt and should not even be
considered evidence that would permit anyone to infer that the claims are true beyond a reasonable
doubt.
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that the jury could consider any evidence that might show the defendant owed less tax,(3) that the
jury must consider all the evidence, and (4) that it is the jurys duty alone to determine the existence
of a substantial tax due based on all the evidence. The Court concluded the instructions were, on
balance, reasonable and that Plainly, the [trial] court did not indicate that the assessments were
conclusive.
The problem with the Second Circuits decision is that it does not deal with the basic
question as to whether the assessments, the notices of deficiency and the Tax Court decisions were
evidence at all sufficient to permit a reasonable juror to determine beyond a reasonable doubt
standard that there is a tax due and owing. Indeed, the only way the Court could get there is to, in
effect, a procedural presumption not a conclusive presumption that there is tax due, in effect,
simply because the IRS says there is tax due. By introducing evidence amounting to no more than
the IRSs claims as to tax due (including a default judgment in the Tax Court were the IRSs claims
were not proved beyond a reasonable doubt), the Government can in effect shift a production or even
a persuasion burden to the defendant as to the issue of tax due and thus prevail without ever having
to prove a tax due beyond a reasonable doubt. I think that is suspect at least.
One thing the Second Circuit did get right, however, was that the jury should not have been
instructed that the assessments were prima facie evidence. The Second Circuit correctly notes that
a jury will more likely confused by using the term prima facie than it is enlightened. The Second
Circuit noted that the concept giving rise to the term prima facie in this context is a procedural
device which may be helpful to the parties and the court but not to the jury. (In this regard, the term
prima facie evidence is most frequently encountered in a procedural context to assign the shifting
of a burden of production, and the courts discussion of this issue indirectly suggests that the Court
may have been thinking that the evidence effectively served that function to at least put the
defendant to some production burden.)
The issue presented in the Silkman cases and in Josephberg, does not usually arise in evasion
of assessment cases. In those cases, the IRS investigates and prosecutes before making an
assessment. As noted above, the Government will put the civil audit and assessment process on hold
and will not make the assessment until after the case is prosecuted. This issue is thus practically
limited to evasion of payment cases.
Finally, there are other instances where a production burden is shifted to the defendant, such
as in the earnings and profits cases culminating in the Supreme Courts decision in Boulware and
the Second Circuits application thereof in Boulware on remand from the Supreme Court which I
discussed earlier.1680 Practitioners should have their antenna up to deal as best they can with those
shifts which erode the requirement that the Government prove the elements of the crime beyond a
reasonable doubt.
1680
See the discussion of corporate diversions and earnings and profits discussed above
commencing on p. 97.
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B.
Hearsay and Right to Confront.

1.
General.
Civil and criminal trials presents the opportunity to use and abuse the hearsay rule.
Furthermore, criminal trials raise a special concern with regard to hearsay the Confrontation
Clauses guarantee that, [i]n all criminal prosecutions, the accused shall enjoy the right . . . to be
confronted with the witnesses against him. The exceptions to the general rule that hearsay is not
admissible implicate and possibly violate the Confrontation Clause. I attempt here a discussion of
the interface of these rules as they may play in criminal tax cases.
FRE 801(c) defines hearsay as a statement, other than one made by the declarant while
testifying at the trial or hearing, offered in evidence to prove the truth of the matter asserted. FRE
801(d) then helpfully states that the following is not hearsay: (i) certain prior statements of the
witness giving testimony is not hearsay; and (ii) certain admissions of a party opponent. FRE 803
then states the general rule that hearsay is not admissible except as provided by properly authorized
rules. FRE 803 and 804 provide certain exceptions to the hearsay rule. Rule 807 provides a residual
exception as follows:
A statement not specifically covered by Rule 803 or 804 but having equivalent
circumstantial guarantees of trustworthiness, is not excluded by the hearsay rule, if
the court determines that (A) the statement is offered as evidence of a material fact;
(B) the statement is more probative on the point for which it is offered than any other
evidence which the proponent can procure through reasonable efforts; and (c) the
general purposes of these rules and the interests of justice will best be served by
admission of the statement into evidence.
In part I think particularly relevant to the present discussion, FRE 804(b)(1) provides an
exception where the declarant is unavailable to testify if the declaration sought to be admitted is
contained in testimony given by the declarant as a witness in a prior proceeding where the party
against whom it will be admitted in the present proceeding was an adverse party in the prior
proceeding. The theory is that the person in the present proceeding had an opportunity to crossexam when it was in his interest to do so. I hope you see that this exception raises at least a
Confrontation Clause issue. As an exception to the hearsay rule, it has merit because it has indicia
of reliability to which the exceptions to the hearsay rule are addressed. Its application in civil trials
is unexceptional. But does it meet the Confrontation Clause applicable in criminal trials? In this
case, probably yes.
What about another exception, this time FRE 804(b)(3)s exception for statements against
interest of an unavailable witness? The Rule states that exception as follows:
A statement which was at the time of its making so far contrary to the declarant's
pecuniary or proprietary interest, or so far tended to subject the declarant to civil or
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criminal liability, or to render invalid a claim by the declarant against another, that
a reasonable person in the declarant's position would not have made the statement
unless believing it to be true.
The statement may be against the declarants interest but also may be inculpatory of another person.
Is it admissible in a criminal case over a hearsay objection? Apparently, although care would need
to be taken to insure that the inculpatory statement as respects the defendant is indeed against the
declarants interest. But once that hurdle is cleared (if it can be cleared), is the prosecution entitled
to get the testimony in over a Confrontation Clause objection?
The Supreme Court addressed this issue in a related context in Crawford v. Washington, 541
U.S. 36 (2004). Crawford was tried for assault and attempted murder. In a police interrogation, his
wife had given the police a statement in the investigation that indicated that the defendant has not
acted in self-defense. The State of Washingtons spousal privilege law made the wife unavailable
to testify against the defendant at trial. The State sought to introduce the wifes statement. The
defendants counsel objected on Confrontation Clause grounds. The trial court admitted the
evidence, applying the then applicable test in Ohio v. Roberts, 448 U.S. 56 ( ) that permitted the
introduction, over Confrontation Clause objection, of evidence that had adequate indicia of
reliability. (Note at this point how that test resembles the catchall hearsay objection in FRE 807.)
Justice Scalia for the majority in Crawford reconsidered the Roberts test and found it lacking.
Justice Scalia said, in effect, confrontation meant confrontation (at least as confrontation was
understood by the framers of the Constitution). Bottom-line, Justice Scalia concludes
Where testimonial evidence is at issue, however, the Sixth Amendment demands
what the common law required: unavailability and a prior opportunity for
cross-examination. We leave for another day any effort to spell out a comprehensive
definition of testimonial. Whatever else the term covers, it applies at a minimum
to prior testimony at a preliminary hearing, before a grand jury, or at a former trial;
and to police interrogations. These are the modern practices with closest kinship to
the abuses at which the Confrontation Clause was directed.1681
Thus, where a testimonial statement is involved, the Confrontation Clause is not satisfied
even if the statement would otherwise be admissible under a solid hearsay exception.
Justice Scalias reasoning to that bottom-line is consistent with his originalist approach to
interpreting the Constitution. He reviews in some detail the history leading to the framers adoption
of the Confrontation Clause and finds that the indicia of reliability test is not a substitute for the
crucible of confrontation. Now, Justice Scalia was careful not to exclude from criminal cases all
hearsay objections, most of which have their genesis on notions of indicia of reliability which is the
test he so plainly rejects. Rather, it is only those exceptions which relate to testimonial hearsay.
And, as noted from the quote, he leaves to another day any effort to spell out a comprehensive
definition of testimonial.
1681
541 U.S. at p. 68.
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Although not providing that definition, the Supreme Court in a 2011 case confirmed that it
was serious about avoiding hearsay in a Confrontation Clause context
Crawford tells us only what the Confrontation Clause commands for testimonial statements.
When confronted with a statement that is non-testimonial, Crawford does not give us an answer1682
although the implication is that there is no Confrontation Clause problem. Since we dont have a
definitive definition of what is testimonial, we likewise do not have a definitive definition of what
is nontestimonial. But, Justice Scalia tells us in passing that business records or statements in
furtherance of a conspiracy are not testimonial.1683 Does this mean that all business records are
admissible if otherwise qualifying for a hearsay exception? For example, what if the policeman in
Crawford incorporated the wifes statement into his business record (as he surely did). Can that
same statement be admitted in evidence to prove the truth of the wifes statement. Surely the same
vice to which the Confrontation Clause is addresses is present even though the testimonial statement
is gussied up in a nontestimonial guise.1684 And what about clearly accusatorial business records
such as laboratory tests of crime scene evidence?
We dont have definitive answers to the implications of Crawford and must await further
development by the courts. In the meantime, defense counsel must be sensitive to the Confrontation
Clause issues that may confront him in the course of trial and make objection even protective
objections as to any potentially damaging evidence that even hints at being subject to the guarantee.
2.
Example - Proving Tax Due and Owing.
An element of the crime of tax evasion is a tax due and owing. Lets focus on evasion of
assessment. Lets assume that the Government charges a specific items tax evasion case against the
taxpayer who allegedly omitted $1,000,000 of income from the return he filed. The Governments
proof of tax due and owing will be in the following logical steps: (1) introduce the return to establish
the baseline; and (2) have an IRS agent add the omitted $1,000,000 income to the taxable income
otherwise reported on the return, compute the correct tax, and subtract the tax reported from the
correct tax. The baseline (step 1) the filed return and the components reported on the filed return
are admissible as admissions by the taxpayer-defendant. Admissions by the taxpayer are not
hearsay1685 and do not implicate the Constitutions Confrontation Clause. The specific item proof
that $1,000,000 was omitted plus the taxpayer-defendants own admissions on the return
establishes the components that, when calculated in the manner indicated, establishes a tax due and
1682
Miguel A. Mendez, Crawford v. Washington: A Critique, 57 Stan L. Rev. 569, 580
(2004).
1683
541 U.S. at p. 56.

See Miguel A. Mendez, Crawford v. Washington: A Critique, 57 Stan L. Rev. 569,
593-596 (2004).
1685
FRE 801(d)(2).
1684
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owing.1686 The taxpayer-defendant is, of course, free to prove up some other different components
of income, deduction and credit to show that there is no tax due and owing, but the Government in
its case is chief may rest on the taxpayers admissions in the filed return. A similar analysis applies
to an overstated or wholly false deduction, in which case the Government proves the base from the
return as filed and eliminates the deduction to establish the element of a tax due and owing.
The analysis is quite different, however, if the defendant charged with tax evasion is not the
taxpayer whose taxes were allegedly evaded. This would be the case, for example, where the
Government charges a tax shelter promoter for evasion of the taxes of a taxpayer other than the
promoter. Can the Government establish the baseline for the tax due and owing calculation by
introducing that absent taxpayers tax return? Assume for present purposes that the taxpayer will
not testify.1687 That taxpayers tax return statement of the component items of income, deduction
and credit does not represent the admission of the defendant in the dock, and there are no other
specific exceptions to the hearsay rule that would permit its admission. It is possible that a court
could admit under the residual hearsay exception (FRE 807), because the element of the crime to
which this evidence is directed is tax in some material amount but not necessarily a specific amount,
and the context gives sufficient guarantees of trustworthiness of the base line that it should be
admitted. If the court does not make that determination, the return would be inadmissible on hearsay
grounds alone.
Even if the Government could clear a hearsay objection, the Constitutions Confrontation
Clause appears to me to be insurmountable, although many disagree. My reasoning is that Crawford
v. Washington, 541 U.S. 36 (2004) establishes that out of court testimonial statements of absent
witnesses do not meet the Confrontation Clause. A tax return signed under penalty of perjury is
certainly an out of court testimonial statement. Thus, the return alone would be insufficient to
establish a tax due and owing. To use a specific example, say that the return reports component
elements of income, deduction and credit which, with an improper shelter deduction, produce a tax
of $10. Without the improper shelter deduction, those components of income, deduction and credit
produce a tax of $100. But that assumes that the other components as reported are correct, and most
importantly that the taxpayer does not have other tax benefits not reported on the return that would
wipe out the tax. In a tax evasion case, the Government must prove an actual, not theoretical tax due
and owing; there is no assumption that there is a tax due and owing from simply proving an
improper deduction.1688 As noted above, if it is the taxpayer himself or herself in the dock, then the
1686
See e.g., United States v. Burkhart, 501 F.2d 993, 995 (6th Cir. 1974), cert. denied,
420 U.S. 946 (1975) (In proving a tax due and owing, the Government may take the taxpayer's
reported income as an admitted amount earned from designated sources. If it can then show that
considerable additional amounts were received but not reported, it has established a prima facie case
of substantial understatement.),
1687
Where this type of evasion charge is leveled against a party other than the taxpayer,
it is not uncommon for the taxpayer to fear prosecution for the evasion and thus be unwilling to
testify.
1688
By contrast, the Sentencing Guidelines permit a rough and ready tax rate percentage
to be used for improper deductions in calculating the tax loss. See S.G. 2%1.1(c) (Notes and
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other statements in the return can be used to determine the tax without a hearsay problem or a
Confrontation Clause problem. But, if it is someone other than the taxpayer in the dock, the
Government must prove in the usual way (specific items reconstruction) the tax due and owing; if
it wants to use the taxpayers statements on the return for that purpose it must put the taxpayer in
the dock in order to pass Confrontation Clause muster. Where, as is often the case, the taxpayer will
not testify, the Government must prove the components of income, deduction and credit the oldfashioned way component by component. In other words, I do not think that, if an unrelated
taxpayer had testified in another case to the various components of his income, deductions and
credits, that testimony would not be allowed over a Crawford objection in a criminal proceeding to
establish a necessary element of the crime charged in the indictment. The tax return, which, as to
the unrelated taxpayer, is the equivalent of testimony given under oath should be no differently.
That would be quite a task with even one taxpayer, particularly a sophisticated and wealthy
one of the type to whom shelters were promoted whose returns have many, many components of
income, deduction and credit. This exercise is particularly dicey where multiple evasion counts and
multiple taxpayers are involved, as in the monster of tax evasion cases presently pending in New
York in United States v. Stein involving 39 counts of evasion as to non-defendant taxpayers all or
certainly most of whom are unwilling to testify.
I am aware of only one case that comes close to addressing this issue. In United States v.
Garth, 540 F.3d 766 (8th Cir. 2008), the defendant was a tax preparer charged with the defraud
conspiracy and making false claims for refund in violation of 18 U.S.C. 2 (titled principals, but
generally referred to as aiding and abetting) and 287 (false claims). At least conceptually, the false
claim charge would require proof that the taxpayers involved were not entitled to refunds and thus
would seem to require the same drill as noted above proving the components of income, deduction
and credit rather than just assuming from some false component item that the taxpayers were not
entitled to the refund.1689 The Court really does develop that relationship at all and seems to treat
the evidence like a false return case such as could be covered by 7206(1) or 7206(2). In any
event, the defendant objected to use of the taxpayers tax returns against her, presumably in the false
claims charge although the court does not say that. The Eight Circuit rejected the challenge as
follows (emphasis supplied):
The Confrontation Clause applies only to testimonial statements, such as prior
testimony at a preliminary hearing, former trial, or before a grand jury and statements
made in the course of police interrogations. Crawford v. Washington, 541 U.S. 36,
Application Notes). The sentencing determinations are made on the basis of evidence having
sufficient indicia of reliability to support its probably accuracy. United States v. Fleck, 413 F.3d
883, 894 (8th Cir. 2005).
1689
Although not directly controlling for the purpose noted in the text, it does appear that
the false claim crime is generally interpreted to have a lesser element of willfulness, if required at
all, than the heightened Cheek requirement for tax crimes generally. See generally, Laura Perry and
Stephanie Salek, False Statements and False Claims, 45 Am. Crim. L. Rev. 465, 488-489 (2008)
(including cases cited in footnotes).
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68, 124 S. Ct. 1354, 158 L. Ed. 2d 177 (2004). Testimony, in turn, is typically [a]
solemn declaration or affirmation made for the purpose of establishing or proving
some fact. Id. at 51 (quoting 2 N. Webster, An American Dictionary of the English
Language (1828)). The Court observed, Most of the hearsay exceptions covered
statements that by their nature were not testimonial for example, business records
or statements in furtherance of a conspiracy. Id. at 56; see also id. at 76 (Rehnquist,
C.J., concurring in the judgment) ([T]he Court's analysis of testimony excludes
at least some hearsay exceptions, such as business records and official records.).
Garth stipulated at trial that the tax returns were business records to avoid the need
to bring in a business records witness[]. She makes no attempt, in her brief, to
argue that the tax returns were testimonial. And, in fact, the returns were not
prepared for litigation, as is expected of testimonial evidence. See United States v.
Torres-Villalobos, 487 F.3d 607, 613 (8th Cir. 2007) (holding that warrants of
deportation were properly characterized as non-testimonial official records that
were prepared independent of this litigation and were not prepared to prove facts
for use in future criminal prosecutions.) Consequently, the admission of tax returns
did not violate Garth's right to confront her accusers.
The reasoning is thin, but it seems that the Court assumed away the problem. The Confrontation
Clause is invoked only if the statements are testimonial, and neither the defendant nor the Court
addressed that issue. As I have noted, tax returns are necessarily testimonial given the purpose of
the jurat to support a tax perjury charge against the taxpayer.
Now, just to properly bracket the issue, lets assume that, instead of charging the promoters
with tax evasion, the Government charged them under 7206(1) or 7207(2), perhaps in conjunction
with 18 U.S.C. 2, with aiding and assisting the taxpayers in filing a false return. Those substantive
charges do not require a tax due and owing; all they require is something false. Merely proving that
the shelters were fraudulent alone would establish a false return via the misreporting of those
fraudulent shelters, and the Confrontation Clause would not be an issue. It is only by charging a
crime requiring a tax due and owing element that the Government will have to meet the burdens
required by the Confrontation Clause.
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CH. 11 - THE PROCESS A TO Z

I.
Introduction.
In the prior chapters, we addressed by topic specific issues related to federal tax crimes. In
this chapter, I review the processing of a criminal tax case from investigation through sentencing.
I do not cover everything that could arise, but by viewing the timeline we can obtain some idea of
context for the matters previously discussed.
In order to keep this discussion within parameters, I assume a traditional tax fraud problem
commencing with the filing of a false return. Most of the considerations apply equally to other tax
crimes. Money Laundering will not be considered, except that some of the materials may make
some comments about money laundering.
I develop the process along the time line that usually attends criminal tax investigations.
I start as early as the initial return filing.
II.
Criminal Investigations to Initial Contact.

A.
After Return Filing But Before Audit.
Your client filed a fraudulent return substantially underreporting his tax liability. He now
has misgivings. He comes to you and expresses great concern and even a glimmer of remorse.
What can you do for him?
Technically, he has filed a fraudulent return. The crime of tax evasion is complete upon
filing the return. There is one exception. If the taxpayer filed his return before the normal due date
(April 15 for an individual taxpayer and March 15 for a calendar year corporation), he can purge the
fraud by filing a nonfraudulent amended return on or before the normal due date. This opportunity
does not apply when the original return was filed late or during an extension period. If, as is usually
the case, the taxpayer cannot qualify for this exception, the question becomes one of damage control.
Since you have read the materials above, you are familiar with the voluntary disclosure
policy.
You can advise your client to make a voluntary disclosure. Assuming that your client
otherwise qualifies, and you do it right, you can give the client some comfort that a voluntary
disclosure will avoid criminal problems for him. You should advise your client, however, there are
no guarantees. Why?
1690
As noted above, the voluntary disclosure policy is just that a policy of the administrators
of the law. It is not law itself. So, the taxpayers ability to force the IRS to apply the voluntary
disclosure to him may be somewhat limited under the Caceres rule. Nevertheless, most practitioners
feel that the IRS will honor the policy, provided the taxpayer qualifies.
1690
See above beginning on p. 552.
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Lets assume first that you believe that your client can qualify for the voluntary disclosure
policy. There are two ways to make the disclosure. First, you can discuss the matter on a
no-names basis with CI; if you state a good case, CI will give reasonable assurance that there will
be no prosecution. This can be a dicey procedure, because you have to make sure that the facts are
as you represent them to CI. Second, you can simply send in an amended return to the service
center. My experience so far is that this works.
The next question you must ask and answer is who prepares the amended return? It is
usually not advisable to have the original tax return preparer prepare the amended return. The
reason has to do with controlling the flow of information and, specifically, putting up legal barriers
to the IRSs access to information that might damage the client. In preparing the original return, the
preparer had access to information and documents that are usually not privileged for the reasons
discussed under privileges. In a criminal investigation, the IRS can get to that information. Also,
in preparing the amended return, the preparer should have access to other information that indicates
that there were serious problems in the initial return filing and may even offer a roadmap to the
fraud. If the original preparer is used for the amended return, the taxpayer will then be at risk that
the return preparer cannot clearly establish what he learned prior to the time the privilege became
applicable. The risk is usually not acceptable, even though there will be some additional costs to
engaging a new preparer.
The preparer of the amended return is brought under the cloak of privilege via the Kovel
technique. However, even here, if the amended return is filed, the IRS could assert that the amended
return preparer is nothing more than a preparer (not needed to perform legal services) or perhaps that
the information he or she receives is not privileged because intended to be disclosed. Where the
budget can afford it, it is better to have a Kovel accountant assist the lawyer by gathering all
potentially relevant information, and then have the lawyer to determine what portion of that
information gets disclosed to an independent return preparer, who is not put under a Kovel
arrangement. In that way, what the preparer knows is discoverable by the IRS, but the IRS should
be unable to go to the attorney and the Kovel accountant to learn what they know. In other words,
by keeping the roles in which they are serving clearly distinct without blurring of the lines, the
attorney-client privilege can be preserved.
Assuming your client follows the advice or does not engage in utter stupidity (remember the
lesson of Tenzer), that should really be the end of the matter. I assume that he does not take your
advice or, alternatively, he has not timely sought your advice.
B.
The Eggshell Civil Tax Audit.
The IRS starts an audit of your clients return. The IRS often audits taxpayers who,
unbeknownst to the IRS at the start of the audit, have major criminal problems. The practitioner
assisting such a taxpayer will have done his homework and ascertained that there is a problem and
the parameters of the problem. The strategy then becomes damage control. This is often called an
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eggshell audit. A traditional source of CI referrals is the civil audit in which the civil agent
discovers information that leads him to believe that a tax crime has been committed.
As noted above, depending upon the interpretation and application of the voluntary
disclosure policy, once the IRS commences the audit it may be too late to seek that avenue of relief.
Even here, however, by careful attention and advocacy, the practitioner may be able to get some
reasonable level of assurance that the civil agent will not refer the matter to CI, so that without a
referral the client will not be investigated or prosecutors. This is not technically the voluntary
disclosure policy, but in order to get that level of assurance the taxpayer will likely have to open the
kimono in order to convince the agent that the taxpayer is not acting in good faith and deserving of
such grace as the agent and his boss can confer.
Also, the practitioner needs to be very careful not to make the clients problems the
practitioners problems i.e., by doing something in the course of the audit that subjects the attorney
to criminal or civil penalties. As noted above, a panoply of provisions potentially apply to the
practitioner who does too much for his client by lying or otherwise frustrating the audit process
see e.g., 7212 and 18 U.S.C. 371 (Klein conspiracy) and 1001. You are, of course, a very
careful practitioner and would not do anything illegal. You might do something stupid, but not
illegal. The problem is that sometimes the line between stupid and illegal blurs.
One of the key danger points is encountered early on during the process of determining the
parameters of the potential criminal problem. The careful practitioner will want to interview all
potential witnesses as soon as possible. The reason is to learn the lay of the land. But, even more
subtly, there can be an important benefit to nailing down each witnesss testimony before the civil
agent has had an opportunity to affect the witnesss memories memory shaping techniques (such as
leading questions, threats to the witness, etc.). The witness may be much more amenable to a
taxpayer-favorable recollection before being put upon, even intimidated, by an IRS agent,
particularly a Special Agent. Obtaining witness interviews in a potential criminal case, however,
presents a danger point for the practitioner.
The practitioner will want first of all a balanced understanding of the witnesss potential
testimony but beyond that will want a taxpayer-favorable version of the witnesss memory. The
latter imperative can lead the practitioner to suggest testimony and shadings of testimony to the
witness and thus subtly venture into the risks of charges of witness tampering or obstructing justice.
Accordingly, it is better form in these cases for the practitioner to be accompanied by another lawyer
or paralegal from his firm who could be a potential witness in favor of the practitioner if that charge
were ever made. And, if possible and potentially helpful to the client, it is important to get a
statement from the witness, perhaps in affidavit form, to commit the witness to a version of the facts
that is helpful to the client (or, at a minimum, mitigates the potential for damage).
Even more fraught with danger than practitioner interviews of witnesses is the taxpayer who
wants to himself get or shape the witnesss memory before the practitioner interviews the witness.
The taxpayer has a vested interest in what the witness would say and is much more likely to try to
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influence the witness improperly. The circumstances are ripe for the IRS to charge that the taxpayer
acted improperly to influence the witness to say something that was not true. The better part of
wisdom is to prohibit the taxpayer from talking to the witness at all and, if there must be commerce
between the taxpayer and the witness (e.g., in a business setting), to prohibit the taxpayer from
discussing the matter with the witness. (Prohibit may be a strong word here and not technically
applicable, since an attorney cannot prohibit the client from doing something; the attorney can,
however, use the strongest cautions possible in advising the client and thereby hopefully convince
the client that the prohibition is in his interest.)
After getting the lay of the land from all of the potential key witnesses and from careful
review of all documentation, the practitioner is in a position to best serve the taxpayer in the eggshell
audit.
During the audit, the practitioner should limit the contact between the agent and the taxpayer.
This is a good practice even if there is no criminal potential in the case. Ask that the agent make all
requests for information through the practitioner. Even better, ask that the agent make all requests
in writing so that there is no confusion about what the request was and whether the response was
untruthful or misleading. Ultimately, if the agent persists in wanting a taxpayer interview, make
sure that the taxpayer is prepared to answer honestly or have you assert the Fifth Amendment or
other applicable privilege where appropriate.
You must also audit the agent track the investigation to make sure you know what the
agent knows at all times. This task has been made easier under the 98 Act. The IRS is now required
to notify the taxpayer before contacting third parties and keep a record of the third parties contacted,
at least during the civil phase of an investigation. And 7609, as amended by the 98 Act now
requires that the IRS notify your client of the summonses issued to third parties. That notice
requirement does not apply in criminal investigations, but the investigation is not yet criminal, so
you can track all third party summonses issued. (If, for any reason, you hear that third party
summonses have been issued and you did not receive notice, you should inquire -- either they were
issued incident a criminal investigation or they were issued in violation of the notice requirement.)
The civil agents sources of information are: from the taxpayer himself or from third parties.
The practitioner will be able to monitor information from the taxpayer and will be aware of the
IRSs obtaining information from third parties by compulsory process. The problem, of course, is
that the IRS can obtain information from third parties who do not require compulsory process. So,
this potential will make it doubly important that the practitioner have interviewed and established
a good relationship with the witnesses in advance. Remember to ask the witnesses to call the
practitioner if he or she is contacted by the IRS.
By careful tracking of the agents activities, the practitioner will know, within reasonable
parameters, what the agent knows. It is important in this process to keep in touch with the agent.
The practitioner can learn a lot, even if the agent does not specifically say that he suspects fraud or
is in the process of transferring the matter to CI. You should remember, of course, that cases such
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as Kontny suggest that the IRS revenue agent (civil agent) can affirmatively mislead the taxpayer
and his or her representative as to the nature of the investigation, but generally agents are
discouraged by the IRM from doing that. The careful and experienced practitioner will often be able
to sense when the audit has turned criminal. In this regard, one of the classic indicia of a referral
to CI is the civil audit that turns quiet, with the audit not progressing as it should. Civil audits are
conducted on a time line, which may vary from case to case, but, if the audit is not progressing, the
practitioner needs to know why. Often, it is because an agent is swamped with other work or is
transferred, but it may also mean that the civil agent has referred the case to CI. When the civil audit
turns quiet, the practitioner should touch base with the agent or his or her supervisor just to find out
what is going on, without, of course, tipping the agent that he is overly concerned about it.
After the civil agent has worked on the case, it can take two directions. First, the agent will
not perceive the case as having criminal potential and will proceed to close the audit with such civil
recommendations as he thinks appropriate. Second, the agent can determine that the case has
sufficient criminal potential that it should be referred to CI. You will recall that the IRM requires
that the agent refer the case to CI when he or she has a firm indication of fraud. (This can actually
happen anytime during the audit process, but it often happens toward the end when the agent
analyzes what he or she has and consults with the group supervisor and/or a fraud coordinator which
is an internal resource that assists in determining whether the case should be referred to CI.) I
assume for present purposes that the referral is made to CI.
C.
The CI Phase.
1.
The Players.
a.
Special Agent.
CI receives the referral from the civil agent. (Keep in mind that CI investigations can start
in other ways, such as informants going directly to CI.) When CI gets the case, there will be new
players. The CI agent, referred to as a Special Agent, will then have primary authority for the
case. While with CI, the criminal aspects of the case take priority over the civil aspects of the case.
This means that the civil audit will not progress to the point of a notice of deficiency or assessment.
b.
Civil Agent.
CI Special Agents may be assisted by a civil agent who is often more technically adept at
discovering and resolving the technical tax issues and making the required tax computations.
c.
Counsel.
CI Special Agents may also be assisted by IRS Counsel who are in-house lawyers for CI.
Counsel serve as advisors to CI during the investigation and in the process of determining whether
the case is appropriate to refer to DOJ. In their role as advisors, Counsel are available to assist with
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respect to legal issues and as to strategies. How involved Counsel may be during any given
investigation varies. In the past, when Counsel was physically and institutionally separate from CI,
Counsels role was often passive during CIs investigation. Now, with Counsel assigned to CI,
Counsel is more proactive in counseling during the investigation and influencing the shape of the
investigation. From the IRSs perspective (hopes), this may mean higher quality investigations with
fewer legal problems.
Often, the practitioner will not be aware of Counsels role because it is played out behind
the scenes. The astute practitioner will be able to see indications of Counsels involvement in, for
example, the document description in the summons (the duces tecum part of the summons). Under
recently promulgated regulations, Counsel is authorized to conduct the Q&A at summons
appearances.1691 I doubt that this presages wholesale Counsel direct involvement in the summons
Q&A, but there will be more. Barring that type of overt Counsel involvement, there is usually
nothing the practitioner can do other than observe and extrapolate as to what is happening with
Counsel and its implications to the client.
Counsel will become more active in those rare instances where the investigation requires
interface with DOJ or the courts. The classic instance where this occurs is when the Agents desire
to enforce a summons or seek a search warrant in support of the investigation. In that case, DOJ
must be convinced to enforce the summons or seek the search warrant.
d.
Role of DOJ Tax.
DOJ (either through DOJ Tax or the AUSAs office) generally has no role in administrative
investigations. Section 6103 prohibits the IRS from sharing any return information (virtually
everything the IRS knows about the taxpayer) with DOJ personnel unless and until either the IRS
has referred the case to DOJ for criminal prosecution or a high ranking DOJ official has made
written request for information. These strictures mean that DOJ has no legal role in an IRS
administrative investigation. Where CI agents need legal advice during the IRS phase of the
criminal investigation, they seek it from the IRS Counsel.
There is one exception to this noninvolvement of DOJ during an administrative investigation.
This occurs if the CI Special Agents desire to enforce a summons or obtain a search warrant during
the administrative investigation. In either of those events, the Special Agents (through Counsel) will
seek the assistance of DOJ Tax and/or the United States Attorneys office, as noted above.
2.
Taxpayer Interviews.
a.
The Initial Surprise Interview.
In the example we are working through, we have assumed a civil tax examination that has
turned criminal. The practitioner will have been involved and will have the appropriate power of
1691
Regs. 301.7602-1(b), promulgated 3/31/05.
- 759 -
attorney, Form 2848, on file with the IRS. If the CI agents desire to interview the taxpayer, they
should make the request through the attorney.1692
However I digress to describe a not atypical situation where the CI investigation arises
where there has been no civil tax examination. The taxpayer has a power of attorney on file. In that
situation, it is not unusual for the CI Special Agent and one sidekick (usually another CI Special
Agent) to show up without advance notice to chat with the taxpayer. The Special Agents will
identify themselves as Special Agents and usually provide a business card so identifying themselves.
The lead Special Agent will read the taxpayer the IRSs special modified version of the Miranda
warnings. Remember the taxpayer is not in custody and the full blown Miranda warnings are not
required. If for any reason the Special Agents do not give that warning, the taxpayer may be able
to suppress any damaging statements he or she makes during the interview, although Kontny may
suggest otherwise.
You will recall that we discussed above the civil agent interviewing the taxpayer after a firm
indication of fraud, which under the IRM means that the civil agent should not be conducting the
interview at all and certainly should not be doing so without the modified Miranda warnings. We
noted some substantial issue as to whether admissions in that setting could be suppressed. Where,
however, CI has taken jurisdiction of the case and proceeds to interview without the modified
Miranda warnings to the target of the investigation, the chances of suppression rise greatly if the
Government attempts to use the fruits of the interview in a criminal prosecution. But the truth is that
Special Agents are trained to give the modified Miranda warnings as the first order of business (sort
of like a Pavlov dog response1693), so the chances of this ever happening are slim. (Indeed, in this
regard, the Special Agents are trained to prepare a contemporaneous memorandum of the interview
with the first template item being that the modified Miranda warnings were read.)
This interview without an attorney is a dangerous situation for the taxpayer, even the
innocent taxpayer (or at least the taxpayer who would be perceived as innocent if properly
counseled). The best thing the taxpayer can do is to decline politely the Special Agents invitation
to talk further and advise that he will consult with counsel who will be contacting them. The worst
thing the taxpayer can do is to engage in a discussion with the Special Agents. The chances of the
taxpayer convincing the Special Agents to fold their tents and go away are not great. It is far more
likely that the taxpayer will not help his case at all or, worse, say something quite damaging.
For example, the taxpayer may be sorely tempted to tell a little lie, either going to the heart
of the matter or peripheral issues. As in Beacon Brass and any number of cases, the taxpayer may
then have violated 18 U.S.C., 1001, may have violated the omnibus clause of 7212, or may have
refreshed a statute of limitations that had either expired or would have expired before the IRS and
DOJ could have completed the work necessary to prosecute.
1692
IRM 9.5.1.4.3 Dealing with Powers of Attorney (7/15/02).

I refer to Pavlovs reflex systems research where dogs developed conditioned reflex
reactions in response to stimuli. See http://en.wikipedia.org/wiki/Ivan_Pavlov.
1693
- 760 -
Bottom line, the situation is fraught with danger and a no-win situation for the taxpayer. If
the taxpayer has a good story to tell, it can be best told through a lawyer. Even if he does not have
a good story to tell, whatever should be told to the agents can still be best told through a lawyer.
Returning to our posited scenario (civil audit turned criminal), if the taxpayer has the good
sense to call his lawyer before proceeding with the interview, the attorney should not let the Special
Agents interview the taxpayer.
b.
Other Taxpayer Interviews.
I am jumping ahead a bit in the CI investigation, but I think it helpful to say here that,
generally, the attorney should not allow CI to interview the taxpayer anytime during the
investigation (even beyond the surprise visit that is the immediate topic). There are always
exceptions to this rule, and I have let Special Agents interview a target taxpayer after I know fully
the lay of the land and have fully prepared the taxpayer by testing e.g., cross-examining to find
out what problems might arise. Then, if I am sure the interview will be helpful to my client, I will
permit it to occur. But, if there is no positive reason for the interview, it simply should not occur.
D.
Witnesses.
The Special Agent will seek to interview third party witnesses. In your initial due diligence,
you will have interviewed all of the witnesses that you could identify, so you will have their versions
of the relevant facts. If you begin your representation only after the criminal investigation has
started, you will have a lot of work to do. Interview the key potential witnesses as quickly as you
can.
As noted above, except in the case of third party record keepers, the Special Agent need not
notify the taxpayer that compulsory process (IRS administrative summons) is being used. And, if
compulsory process is not needed because the third party record keeper cooperates without
compulsory process, the taxpayer will not be notified even then. Most third party recordkeepers will
promptly not respond without receiving a summons, so this is not a major problem.
Since you know now that the investigation is going on, you might want to touch base
periodically with the witnesses to determine whether they have been contacted by CI and, if they
have, to then de-brief them to determine; (1) what lines of questioning CI pursued, which will give
you a feel for their focus; and (2) what information and/or documents the witness gave CI.
E.
Documents.
1.
The Taxpayers Documents
The CI agents may want to gather to documents from the taxpayer. I have noted above in
the Fifth Amendment discussion that the ability for the taxpayer to assert the Fifth Amendment
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privilege to withhold documents is problematic. There may be some opportunity, of course, to assert
privilege as to the testimonial aspect of producing the documents. You will recall that this act of
production doctrine saved Web Hubbells bacon.
In all events, the target of the investigation will not willingly deliver up incriminatory
documents even if they are not subject to the privilege. What do you do when the IRS issues a
summons for the documents you would rather the IRS not have?
The target can, of course, destroy the documents, but that is illegal, and the lawyer will not
advise that as an option for the taxpayer. The taxpayer can, alternatively, simply refuse to comply
with the IRSs administrative summons demanding the documents or, better, assert some colorable
defense to compelled disclosure. The IRS may then seek judicial enforcement of the summons, and
Hubbell teaches there is a window of opportunity to avoid enforcement if the IRS has too broadly
defined the scope of the summons so as to implicate the Act of Production doctrine.
2.
Third Party Documents.
If the IRS seeks documents from third party record keepers (as defined, such as a bank,
lawyer or accountant), the IRS must notify the taxpayer, even in a criminal investigation. The
taxpayer can bring a motion to quash such summonses, but the taxpayer will almost invariably fail
because the IRS can certainly meet the minimal Powell requirements.
The IRS can also use the IRS summons to obtain documents from third parties who are not
within the class defined as third party recordkeepers. As I noted above, the IRS need not give the
taxpayer notice of the use of that summons in a criminal investigation, but the taxpayer can and
often usually learns from the third party that it has received such a summons. The taxpayer may also
move to quash those summonses, also with minimal chance of success.
The IRS may also use the John Doe summons to obtain documents, but the taxpayer will not
be notified about that until it is too late. The John Doe summons is rarely a factor in an IRS criminal
investigation where the target of the investigation has been identified.
So, bottom-line, the taxpayers ability to prevent the IRS from obtaining information from
third parties is limited.
F.
Vicarious Admissions.
We discussed above in discussing conferences with the IRS and DOJ the concept of the
vicarious admission. In this context, it would be an admission, including statement of a damaging
fact, to the agent by the attorney representing the target of the investigation. Under agency
principles, the attorney is generally deemed to have authority to make representations for the client
and therefore the admissions can be used against the client, generally.1694 The IRM provides that
1694
FRE Rule 801(d)(2)(C) & (D).
- 762 -
the IRS may use vicarious admissions.1695 We discussed this policy above in the context of the
exit conference when the IRS is sending the case to DOJ Tax with a recommendation for
prosecution or further investigation by the grand jury. It is important, however, to keep this policy
in mind throughout the investigation, for statements of the attorney may be used against the client
in the subsequent criminal case.
G.
Concluding the Investigation.

1.
Recommending Criminal Prosecution.
When CI concludes the investigation, it has two choices. First, and the best for the taxpayer,
CI can decline criminal prosecution and refer the case back to Examination. Second, CI can
forward the case to DOJ Tax with a recommendation for criminal prosecution. I focus on this
second alternative.
CI recommends criminal prosecution when the case is otherwise within its priorities and the
evidence is sufficient to indicate guilt beyond a reasonable doubt; and a reasonable probability of
conviction.1696 Typically, of course, CI will not have devoted investigative resources to a matter
not within the priorities. But, if they have done so and have a substantial investment in the matter,
CI may be inclined to recommend prosecution of a case only marginally within its priorities. It then
becomes the lawyers job to convince CI that it should not prosecute despite this investment of time.
Failing convincing CI of that, the advocate may have a better opportunity of focusing this type of
argument at the later decision points (DOJ Tax and, conceivably, the United States Attorney) who
will have neither a time nor an emotional commitment to the case and can take a broader view of
the Governments priorities.
2.
The Special Agents Report.
CI prepares a Special Agents Report (referred to as an SAR).1697 The SAR pulls together
the investigative work and tells CIs story of why the case is worthy of criminal prosecution. The
SAR also develops the sentencing factors based on the Sentencing Guidelines. The SAR will form
the basis for further consideration in the many steps between CI and actual criminal prosecution.
The SAR will also be considered in the sentencing phase if the taxpayer is convicted.
Consistent with the general rules in our criminal tax system that the taxpayer is not entitled
to discover the Governments criminal case (except in certain contexts discussed below in the
context of criminal discovery at the trial stage), the SAR is not provided to the target(s) of the
investigation until much later in the process, if at all. By careful attention to the Special Agents
1695
IRM 31.4.2.3(1) (7/2/90).

IRM 31.3.1.1(1).
1697
The SAR is usually used in administrative investigations. In grand jury
investigations, the Summary of Investigation (SOI) format may be used. IRM 9.5.8.2 (8/10/04).
1696
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activities during the investigation, however, the astute lawyer will frequently have a very good idea
of the contents of the SAR.
3.
The CI Conference.
If the taxpayers attorney becomes convinced that there is a substantial possibility that CI
will refer the case to DOJ, the attorney should request a conference prior to the referral. Almost
invariably, CI will grant the request. The conference is the last shot at stopping the referral and,
because CI has by that time determined to make the referral, stopping the referral is a long shot
indeed. The taxpayers attorney should, however, attend and participate, at least at some level.
Even where the taxpayers attorney has no reasonable prospect for stopping the referral,
having the conference may be in the taxpayers best interest. The taxpayers attorney may be able
to learn important information and nuances of the IRSs view of the case. The IRS does not offer
the conference as an opportunity for taxpayer discovery, but a conference skillfully managed by the
taxpayers attorney to offer minimal information to the IRS (certainly no damaging information)
might still result in the taxpayers attorney learning important information from the questions asked
and information disclosed.
The conference may be attended by the Special Agent(s), the group manager, CIs Counsel,
and the Special Agent in Charge (SAC) or his delegate. The taxpayers attorney will attend.
Whether the taxpayer should attend is a judgment call. I generally do not have the taxpayer attend
because I usually can articulate no affirmative reason to have him or her attend. A taxpayer at that
conference will communicate something to the IRSs attendees (even if by body language); there
is great risk that the communication will not be good or will be misinterpreted. Without the taxpayer
present, the taxpayers attorney can focus more clearly on the presentation he or she wishes to make
and on properly interpreting the IRS personnels communications without being distracted by a
concern that the taxpayer may be doing something that would be counterproductive.
4.
DOJ Referral.
The IRS will refer a case for prosecution only where the evidence is sufficient to indicate
guilt beyond a reasonable doubt and where there appears to be a reasonable probability of
conviction.1698 If the IRS decides to refer the case to DOJ with a recommendation for prosecution,
the Special Agent will put the final touches on the SAR and Counsel will prepare a Criminal
Reference Letter, often acronymed to CRL, which is a comprehensive summary of the
recommendation and its basis .1699 In many respects, the CRL parallels the SAR which is far more
detailed and contains extensive exhibits in support. The contents of the CRL generally include
discussion of the following topics:
(a)
Referral. The general nature of the referral and the statute of limitations.
1698
IRM 31.4.14.1(1).
See IRM 31.4.7.
1699
- 764 -
(b)
Venue.
(c)
Case Origin and Initial Contact.
(d)
Taxpayer's Background.
(e)
Tax Liabilities and Computations.
(f)
Theory of Case.
(g)
Criminal Offense.
(h)
Principal Evidence.
(i)
Willfulness.
(j)
Indirect Methods of Circumstantial Proof.
(k)
Conferences and Defenses.
(l)
Sentencing Guidelines Calculations and Issues.
(m)
Whether any civil action has occurred or will or should occur.
(n)
Enclosed Transmittals. This will include, for example, the detailed SAR and
its exhibits.
(o)
Return of Case Materials.
(p)
Pretrial Diversion.
(q)
Conclusion. The conclusion will include a statement that Counsel is
convinced of guilt beyond a reasonable doubt and believes there is a reasonable
probability of conviction.1700
In addition, the IRS has indicated that the CRL may include a discussion of potential impeachment
information about the IRS Special Agents who may testify at trial.1701 This is in anticipation of
Giglio/Henthorn issues that may arise at trial. Obviously, the CRL would be an invaluable
document to obtain. Do you think that you can obtain it? Why not? (Is the latter a leading question
in anticipation that your answer to the first question is no?)
III.
Processing the Criminal Case to Indictment.

A.
Introduction.
I discuss in this section the processing of the DOJ referral. All recommendations except
money laundering recommendations have elaborate processing and review requirements in DOJ
Taxs Criminal Enforcement Section (CES) designed to insure the cases suitability under the
priorities for the criminal enforcement system.
Money laundering recommendations are forwarded directly to the U.S. Attorneys office
since those prosecutions do not implicate the criminal tax enforcement system. When, however, the
money laundering charges are closely related to the tax recommendations, they will be processed
the same as the tax recommendations.
I turn to the processing of the CRL in the garden variety tax case.
1700
1701
IRM 31.4.7.2.
ILM 199902018 (reproduced at 1999 TNT 11-48 (1/19/99)).
- 765 -
B.
Department of Justice Consideration.

1.
Main Justice (DOJ Tax CES).
CES attorneys review the CRL and make a recommendation as to whether to authorize
criminal tax prosecution. The AAG or her delegate then makes the decision whether to prosecute.
Taxpayers are usually afforded a conference in Washington and should make the request for
the conference when advised that the case has been referred to the CES. Some experienced
practitioners make the request to the CES for a conference when they first begin to the believe that
a referral to CES is likely. Their thinking is that CI may not notify the taxpayers attorney of the
referral or may not timely notify of the referral. Hence, these attorneys reason, an advance request
to CES will avoid the risk that the request would not otherwise be made for whatever reason. CES
will receive the advance request and, when (and if) the case is referred, then treat the advance
request as a timely request for conference.
The role of CES cannot be overstated. All criminal tax prosecutions must be approved by
CES (including the AAG who oversees CES) or must fall under one of the advance approval systems
for certain limited types of cases. CES must insure that all tax prosecutions are consistent with
overall national enforcement priorities. The practitioner must have some sense of the national
criminal tax enforcement priorities and the limited resources that require CES to only authorize
prosecutions consistent with those priorities. Some taxpayers who have had the misfortune to slip
through the IRS to CES may still not be within those enforcement priorities, and a case can still be
made to the CES that they should not be prosecuted.
2.
AUSA.
The United States Attorney for a district is the Governments lawyer in that district. The
United States Attorney usually acts through Assistant United States Attorneys (AUSAs who are
assigned to represent the Government in individual cases). In tax cases, the responsibility is
delegated to an AUSA. Upon receipt of authorization from CES, the AUSA will seek an indictment
from the grand jury or conduct such further grand jury investigation as may be necessary.
On rare occasions, CESs decision to prosecute may not meet well with the United States
Attorney or the AUSA. The United States Attorneys office may not have the staff to handle the
matter or his or her priorities may be elsewhere. The AUSA who would have to present the case to
the grand jury and try the case may not think the case will play as well before a local jury as CES
thinks it will. The case can be sent back to CES for reconsideration, but if CES is intent upon
prosecuting and cannot get the United States Attorneys office to handle it, CES has the option to
field the attorneys required to present to the grand jury and try the case. Usually, however, as in the
Southern District of Texas, there is a very good working relationship between the United States
Attorneys office and CES and the processing of criminal tax cases in the United States Attorneys
office is quite professional. That means that CES will respectfully consider any deficiencies in the
- 766 -
case or priorities of the case that the United States Attorney or his designated AUSA raises and may
well decline to pursue the matter further. The case will then be returned to the IRS for further civil
processing as may be appropriate. This rejection of the case at the local level is the exception and
not the norm, so usually when the case is referred it will be presented to the grand jury, indicted, and
trial or plea will ensue.
As soon as the taxpayers attorney has been advised that the case has been referred to the
United States Attorneys office, the taxpayers attorney should contact that office, determine the
AUSA to whom the case is assigned, and contact that AUSA. Although stopping the train is
unlikely at that stage, you wont unless you try.
C.
Grand Jury.
Suffice it to say at this point that, given the standards that CES imposes for referring the
matter to the grand jury in the first case, an indictment will probably come forth in the shortest time
that the U.S. Attorneys offices priorities permit. This is subject to one caveat as to timing. CES
often prefers that tax indictments come in time that publicity could influence taxpayers during the
filing season. Late March or early April indictments occur frequently; some observers thus
characterize this phenomenon as the April effect.1702 This timing may also be influenced by statute
of limitations considerations, for frequently the statute of limitations will fall on April 15, so that
an indictment on or before April 15 is necessary to preserve the statute of limitations for the farthest
out year.
The indictment will usually be preceded by the lead Special Agent giving grand jury
testimony as to his version of the taxpayers grievous offenses to the tax system. The testimony will
be laced with hearsay, speculations, and often even some hard evidence, but the grand jury will
usually not bestir itself to ask critical questions or really understand the details of what happened.
In short order an indictment will come forth.
CES may require or the AUSA may conduct further investigation prior to seeking an
indictment. If that occurs, the time to indictment will be longer. But even so, an indictment is
usually forthcoming, for CES will not usually refer the case for further investigation unless it
believes the further investigation is likely to result in indictment. If there are simply too many holes
of uncertain scope in the investigation, CES will usually kick it back to the IRS, with either an
admonition to close it up or get it right before sending it back.
You should attempt to debrief any witnesses that appeared before the grand jury. You may
recall that normally matters occurring before the grand jury are secret.1703 Grand jury witnesses,
however, may disclose the content of their testimony.1704 Remember also that witnesses do not have
1702
See TRAC, The April Effect IRS Prosecutions Time for Tax Season, 120 Tax
Notes 975 (9/8/08).
1703
FRCrP Rule 6(e).
1704
FRCrP Rule 6(e)(2).
- 767 -
to actually appear before the grand jury for their testimony to be considered by the grand jury.
Hearsay testimony before the grand jury is acceptable, so frequently the prosecutors assisting the
grand jury along with IRS Agents (or other Government agents) assigned to assist the grand jury in
the grand jury investigation will interview witnesses who have been subpoenaed or threatened with
a subpoena, and then those Agents will summarize the information provided by the witness.
Sometimes, those interviews will be conducted just by the agents and summarized for the grand jury.
How will you know which witnesses have been subpoenaed or threatened with a subpoena?
You usually wont, unless the person subpoenaed or threatened tells you, for that information also
is grand jury information that can be disclosed only by the witness. You thus as a cautionary matter
should contact persons who might be potential witnesses. If they will talk to you (there is no
requirement that they talk with you), you can debrief them to find out what they may have told the
Agents and/or the grand jury, what documents they provided the Agents and/or the grand jury, and
perhaps develop other useful information not inquired into by the grand jury. (If you were involved
in the IRS administrative investigation phase, you might well have already interviewed the witness,
but you should do so again to find out the focus of the grand jury investigation phase.) You should
note finally in this regard that a financial institution may be prohibited from disclosing its receipt
of a grand jury and delivery of documents to the grand jury for a period of ninety days.1705
D.
Special Considerations.
1.
Plea Bargaining.
During this period, the taxpayers counsel can consider what might be available through plea
bargaining. He can start that process upon the referral to DOJ Tax CES and, if no agreement is
reached, continue it with the AUSA. You will want to consider the plea bargain materials above.
2.
Immunity.
You will want to see if you can get immunity for your client. Immunity will require that
your client have something to offer the Government. Under the facts here, however, your client has
nothing to offer but himself; hence plea negotiations offer the more fruitful possibilities.
IV.
Indictment to Trial.
A.
Charging.
1.
Indictment or Information.
The criminal charge is brought by indictment unless the defendant agrees to be charged by
information. FRCrP Rule 7(a) & (b). Both the indictment and the information should be a plain,
concise statement of the essential elements of the criminal charges brought. That opens the criminal
1705
12 U.S.C. 3413(I)
- 768 -
case, just as a complaint opens the civil case. That sets the various procedures in motion for
processing the case to judicial resolution.
The Government may file a superseding indictment that cleans up problems in the first
indictment and, sometimes, adds additional charges. As we noted in discussing statutes of
limitations,1706 superseding indictments may have statute of limitations infirmities if new charges
or materially different allegations are presented.
The indictment is a public document. FRCrP Rule 6(e)(4) permits the Magistrate Judge to
seal an indictment until the defendant is in custody or has been released pending trial. The
following is from a Federal Judicial Center publication:
An indictment is sometimes filed under seal and kept sealed until the
defendant appears. The indictment is kept sealed so as to not tip off the defendant.
In some districts, indictments are initially sealed as a matter of course. Once the
defendant has appeared, the indictment can be unsealed. If the defendant cooperates
with the governments prosecution of others, who may be defendants in the same
case or defendants in cases with other case numbers, then the case may remain sealed
because of cooperation. Sometimes an indictment remains sealed after the defendant
appears because no one thought to unseal it.
In a multi-defendant case, it is possible to seal the prosecution against one
defendant while the prosecution against another defendant is not sealed. For this
project, only cases sealed as to all defendants were counted as sealed cases. In a few
of these, the court kept the case sealed until all defendants appeared, which
presumably would require either the explicit or implicit consent of those defendants
who did appear.
Sometimes the government asks the court to dismiss a sealed indictment
against a defendant who has not yet appeared. Perhaps the government has decided
not to prosecute the defendant after all, or the government has decided to prosecute
the defendant with a different indictment or in a different jurisdiction. In a few cases,
the sealed indictment was transferred. It is not clear whether such indictments should
remain sealed permanently.1707
Sealed indictments are troubling.1708 Sealed indictments are not consistent with the
fundamental concept that justice and the proceedings in the justice process are and should be open.
1706
See text beginning on p. 467.

Sealed Cases in Federal Courts, pp. 17-18 (Federal Judicial Center October 23, 2009),
at http://www.fjc.gov/public/pdf.nsf/lookup/sealcafc.pdf/$file/sealcafc.pdf.
1708
This following summary of sealed indictment practice and law is summarized from
John Stinson, Secret Indictments: How to Discourage Them, How to Make them Fair, 2 Drexel Law
Review 104 (2009).
1707
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Sealed indictments impair the fundamental imperative of a statute of limitations for a crime, a
concept that most would consider includes both the actual indictment and notice to the defendant.
Furthermore, depending upon the length of delay before being unsealed, sealed indictments impair
the right to speedy trial, a right that is both statutory and based on fundamental notions of due
process, and a defendants ability to defend charges that could be stale. The general parameters for
sealed indictment law and practices are (this may be more of a best practices list):1709
1.
In requesting the sealed indictment, the prosecutors should state the reason for
sealing so that the judge considering the request, usually a Magistrate Judge, can
consider the need for sealing. (Practice in some districts may be a bit lax on this,
however.1710)
2.
The judge should order indictments sealed only where exigent circumstances demand
secrecy and only for so long as those exigent circumstances continue to exist.
3.
Sealed indictments, if brought within the applicable statute of limitations, are timely.
However, if unsealed after the statute of limitations has expired or even after a
substantial period of time has expired, the prosecutors should be required to explain
the exigencies that required sealing during the period of sealing. The indictment
should be dismissed if the defendant can show prejudice not justified by the need for
sealing the indictment.
As noted above, the most common articulated reason for sealing is the need to avoid tipping
off one or more of the defendants who might otherwise become a fugitive. If indeed the defendant
is a fugitive, of course, the statute of limitations is tolled,1711 so the filing under seal is not needed
to obtain a statute of limitations benefit.
The potential for sealed indictments is a looming presence in one of the broadest criminal
initiatives the Government has undertaken recently U.S. taxpayers use of offshore financial
accounts to hide taxable income. Many of the U.S. taxpayers and their enablers (such as Swiss
bankers) reside abroad or are frequently abroad. Some of the U.S. taxpayers have feared that, if they
did not join the offshore voluntary compliance programs (in seriatim iterations), the Government
might obtain enough information to indict, obtain a sealed indictment and pick them up when they
go through customs upon re-entering the U.S. The enablers cannot join the offshore voluntary
compliance program. Their solution is to avoid coming to the U.S. or, otherwise, doing some type
of traditional voluntary disclosure where they can serve up enough skullduggery by other persons
(e.g., bank clients or other enablers) that the IRS / DOJ may give them a pass.1712
1709
This is my own synthesis from the article and, I hope, is not too far off the mark. I
recommend readers desiring more information to read the article.
1710
United States v. Gigante, 436 F. Supp. 2d 647 (S.D.N.Y. 2006).
1711
18 USC 3290.
1712
A sealed complaint -- an indictment temporary substitute -- was used to pick up
Michael Little, an alleged enabler, on his entry into the U.S. See my Federal Tax Crimes Blog entry,
British Lawyer Charged in Swiss Bank Mess Related to UBS Account (5/11/12).
- 770 -
2.
Complaint.
Sometimes the Government will need to start a criminal proceeding before an indictment can
be obtained. The Government may file a complaint which is a written statement of the essential
facts constituting the offense charged.1713 When a complaint is filed, upon a showing of probable
cause to believe that a crime has been committed and that the individual named in the complaint
committed it, the magistrate judge will issue an arrest warrant or, upon request of the attorney for
the Government, a summons.1714 As in grand jury proceedings, the determinations may be based
upon hearsay evidence.1715 These are just interim procedures in order to permit the Government to
take action in exigent circumstances before the constitutionally required indictment can be obtained.
For example, if a person who the Government believes should be considered for indictment is about
to leave the country, the Government may file a complaint in order to obtain an arrest warrant.
When the Government thereafter presents the matter to the grand jury, it is possible that the
grand jury will not indict. FRCrP 6(f) provides that If a complaint or information is pending
against the defendant and 12 jurors do not concur in finding an indictment, the foreperson shall so
report to a federal magistrate judge in writing forthwith. This will result in a dismissal of the
complaint or information.
3.
Arrest or Summons for Initial Appearance.
Historically, in tax cases, the attorney will have had substantial discussions with the AUSA
shortly prior to the indictment. In those negotiations, the attorney will want to attempt to negotiate
the process whereby the taxpayer/defendant makes his or her initial appearance. In these post-Enron
times, U.S. Attorneys offices are beginning to insist that the taxpayer be formally arrested pursuant
to arrest warrant issued when the indictment is returned. Previously, at least in tax cases, the AUSA
would usually agree, upon request, not to proceed by arrest warrant but issue a summons for the
initial appearance before the federal magistrate judge. (Authors editorial comment: requiring arrest
of a defendant who clearly will appear pursuant to a summons makes no sense and is one of the
counterproductive fallouts of Enron and related financial disclosure excesses where the U.S.
Attorney wanted to make a point with formal arrests, handcuffing and transport to the courthouse;
hopefully, as we put the brunt of these financial excesses behind us, clearer perspective will show
that formal arrests should not be required where they really are not necessary.)
4.
Miscellaneous.
You will, of course, double check at this opening stage to see whether the statute of
limitations bars prosecution for any or all of the charged offenses. Well assume for present
purposes that the Government has not obtained the indictment outside the applicable six-year statute
of limitations for tax offenses and the applicable five-year statute for nontax offenses charged.
1713
1714
1715
FRCrP Rule 3.
FRCrP Rule 4(a).
FRCrP 4(b).
- 771 -
B.
Pre-Arraignment Issues.
If the indictment does not fairly advise the taxpayer of the charge, you will want to consider
filing a bill of particulars under FRCrP Rule 12. See Rule 7(f) (authorizing the Court to so order.)
A bill of particulars serves the limited role of advising the defendant of the nature of the charge; it
is not a discovery device.1716 A request for a bill of particulars is addressed to the sound discretion
of the trial judge.
As I mentioned earlier, the defendants attorney will usually have had substantial preindictment discussions with the AUSA acting as prosecuting attorney. In addition to the arrest, you
will want to negotiate on behalf of your client issues such as conditions of release, bail if the
Government desires bail, and the position the AUSA may take as to travel outside the district
(including, notice of travel and possession of a passport).
You will, of course, want to consider continuing the plea negotiations or starting them if you
have not had them before.
C.
Initial Appearance and Arraignment.
Upon indictment, the defendant will be arraigned in a hearing in which the defendant enters
a plea and conditions of bail are set. See Rule 10, FRCrP.
Getting to arraignment may be an adventure, though. Normally in tax cases, the defendant
is served a summons with the indictment. The summons commands the defendants appearance at
the court for the arraignment. However, in recent years, it has become not uncommon in high profile
white collar criminal cases for the prosecutors to put on a show, known as theperp walk, where
the charged defendant is handcuffed, read his or her rights and led from the place of surrender (often
the FBI or IRS offices) and brought to the courthouse for the arraignment. During the process, the
press is given the photo op putting the defendant in a posture connoting guilt.1717 The United
States Attorneys Office for the Southern District of New York, under the leadership of Rudy
Giuliani as United States Attorney, began to prominently employ the so-called perp-walk for
white collar criminal defendants.1718 I am sure you can see that, particularly for prominent citizens,
the perp walk is a form of pre-conviction punishment through public embarrassment and raises
serious constitutional concerns.1719 Despite the constitutional concerns, the prosecutors have great
power to insist on the perp walk. The prosecutor is guided in exercising that power by a requirement
1716
United States v. Addonizio, 451 F.2d 49, 63 (3d Cir. 1971). United States v. Smith,
776 F.2d 1104, 1111 (3d Cir. 1985). In United States v. Whatley, 480 F. Supp. 307, 309 (W.D.
Okla., 1978), the Court noted the particular importance of a bill of particulars in a tax case in order
to enable the accused to prepare his defense and avoid surprise at trial, and a motion for a bill of
particulars in a tax case should be liberally construed.
1717
Lauro v. Charles, 219 F.3d 202, 212 n.7 (2d Cir. 2000).
1718
William R. Mitchelson and Mark T. Calloway, How to Avoid Letting a Perp Walk
Turn Into a Parade, The National Law Journal (3/21/06) (from In House Counsel (Law.com)).
1719
See Lauro v. Charles, supra, discussing these concerns.
- 772 -
that the perp walk serve some legitimate purpose beyond the show and then will have qualified
immunity in exercising that discretion.1720 Fortunately, our experience is that prosecutors in tax
cases rarely will insist on the perp walk. Indeed, for example, in the much publicized KPMG tax
shelter criminal case the largest criminal tax case ever the United States Attorney for the
Southern District of New York, who has tuned the perp walk to perfection, did not insist upon the
perp walk. Nonetheless, when you know that an indictment is in the pipe line, you should engage
the prosecutor early to confirm that there will be no perp walk.
At the arraignment, of course, your client will plead not guilty.1721 It is possible that a plea
agreement could be reached and entered at the arraignment, but that is not usual in tax cases.
At the arraignment, the Government may ask for bail or the court may sua sponte raise the
issue. You will oppose bail, unless, in the expectation of the court imposing bail, you have agreed
in advance to the Governments bail request as a way to mitigate the damage.
In addition, the defendant will usually be asked to consider signing a waiver of the Speedy
Trial Act1722 which otherwise requires that a criminal defendant be brought to trial within 70 days
from the latest date the filing of an information or indictment, or the first appearance before the
court.1723 If there is no waiver and the time limit is exceeded, an indictment shall be dismissed on
motion of the defendant, with or without prejudice.1724 Certain delays are excludable from the
70-day period.1725 For example, court ordered delays are excludable if the court makes a finding that
the ends of justice served by the continuance outweigh the best interest of the public and the
defendant in a speedy trial.1726 Also, a further example, delays caused by pretrial motions are
excluded, provided that the delays are reasonable.1727
D.
Pre-trial Matters.
1.
Motions.
Pretrial Motions are governed by FRCrP Rule 12(b)(2) and (3) and Rule 47. You will want
to review those Rules carefully.
If you have dispositive motions, you will want to make them as soon as possible, for if
granted, they will terminate the case. A statute of limitations defense would be the classic pre-trial
dispositive motion. In addition, we learned above that certain types of uncertainty in the law may
1720
Id.
Arraignments are addressed in FRCrP Rule 10.
1722
18 U.S.C. 3161-3174.
1723
18 U.S.C. 3161(c)(1).
1724
18 U.S.C. 3162(a)(2).
1725
See 3161(h).
1726
3161(h)(8)(a). The trial judges application of this exception is reviewed on appeal
under an abuse of discretion standard. United States v. Larson, 417 F.3d 741 (7th Cir. 2005).
1727
3161(h)(1)(F); see Henderson v. United States, 476 U.S. 321, 323 (1986).
1721
- 773 -
eliminate the willfulness element as a matter of law. See James/Critzer/Garber. That type of
argument is particularly well suited for pre-trial resolution. And, in order to set the context in
responding to such a pre-trial motion, the Government may well divulge more details of its case
prior to trial than it would have otherwise.
2.
Discovery.
a.
Limited Discovery.
You will particularly want to pursue such discovery as allowed1728 and file appropriate
motions. In the event you are concerned about preserving testimony that may not be available at
trial (e.g., because the witness has a fatal illness), you may move to take the testimony by
deposition.1729
The discovery from the Government that may be particularly useful in tax cases is:
documents and tangible objects available under Rule 16(a)(1)(c).
the taxpayers statements, available under Rule 16(a)(1)(A).
- reports of experiments and tests under Rule 16(a)(1)(D).
- a written summary of the Governments expert witness testimony under FRE Rules 703-5,
but caveat the requirement of reciprocal discovery.
- electronic and mechanical surveillance under Rule 16(a)(1)(A).
- statements of alleged indicted or unindicted co-conspirators.1730
- evidence the Government intends to offer under FRE 404(b).
- production of documents in advance of trial per Rule 17(c).
We discussed Brady and Jencks Act disclosures above.1731
Some portions of the SAR or SOI may be available under these disclosure requirements.1732
Sometimes the DOJ attorney or AUSA will give you the whole report. It does not hurt to ask.
1728
1729
1730
FRCrP Rule 16.

FRCrP Rule 15.
United States v. Jackson, 757 F.2d 1486 (4th Cir. 1985), cert. denied 474 U.S. 994
(1985).
1731
See also Rule 26.2, which incorporates the Jencks Act in the Federal Rules of
Criminal Procedure.
1732
United States v. Cleveland, 507 F.2d 731 (7th Cir. 1974).
- 774 -
(Remember the great scene in My Cousin Vinny where Vinny schmoozes the DA who responds by
offering him the entire file; Vinny is so proud of his schmoozing ability but is later reminded by the
magnificent Marisa Tomei, his hair dresser girl friend and erstwhile auto mechanic expert who
bothered to read the law books, that the DA had to give up the files; theres a good lesson there -much effort, schmoozing or otherwise can be avoided by knowing the law.)
A relatively recent phenomenon is for the prosecutor in tax cases to adopt an open file
policy whereby the defendant is given access to all of the files (except certain privileged matter).
The taxpayer may pursue discovery from third parties by use of the subpoena for testimony
and/or documents under Rule 17(c).1733
And, of course, the defendants counsel should pursue informal discovery by
communications with the AUSA. Perhaps even the old schmoozing thing as Vinny tried.
b.
Prosecutors Open File Policy.

(1)
The Concept and General Practice.
One discovery strategy that prosecutors use is to adopt an open file policy the defendant
is given access to all of the prosecutors files except certain privileged documents (such as the
portions of the SAR that are privileged). The tax prosecutors in the Southern District of Texas have
implemented a variation of this policy for some time.
The policy has much to commend it from the prosecutors perspective. If the prosecutor
were to insist that he or she had to provide only the types of discovery required in criminal
prosecutions (discussed above), the Government would itself have to expend resources in making
the decision as to whether each of the documents must be disclosed and risk jeopardizing all or some
part of the prosecution if it made bad judgment calls in the process. It is thus easer to turn it all over
(except selected portions that clearly are not required to be disclosed) and let the defendant or
defendants have at it.
And, of course, in the open files being turned over will be documents meeting other
requirements e.g., Brady and Jencks Act materials. So in one, relatively simple, process the
Government touches a lot of the required bases to insure what it hopes will be an error-free homerun (conviction).
In most tax cases, of course, this is not a particular problem because the document the
prosecutors have and turn over is manageable. Where, however, the document set is massive,
significant issues are raised.
1733
See United States v. Nixon, 418 U.S. 683, 699-700 (1974).
- 775 -
(2)
Massive Document Dumps.
The open file policy in a massive document case can be a most troublesome process for a
defendant on limited resources. The issues and sensitivities involved in such document dumps were
addressed in a pretrial order in United States v. Anderson, 416 F. Supp. 2d 110 (D.D.C. 2006).
Anderson is a criminal tax case which the IRS ballyhooed upon bringing the indictment as the
largest criminal tax case involving an individual in history.1734 Anderson involves a large document
set turned over by the prosecutors under an open file policy. Anderson cried foul in several respects
and, by motion, asked the district court to resolve the complaint.
The Anderson Court held:
the prosecutors must notify defendant of the documents otherwise discoverable under
Rule 16 (in this case the documents seized pursuant to search warrant) that the
prosecutors intend to use in the case-in-chief, just as Rule 12(b)(4)(B) specifically
requires. The Court noted that the notice need not include documents that may be
used at trial for such purposes as refreshing its witnesses recollection, impeaching
defendants witnesses, or presenting its rebuttal case, so long as the use of [those
documents] was not planned in advance of trial. Obviously, however, if the
prosecutors fail to give notice of one or more key documents and then try to
shoehorn them into these exceptions, the Court is likely to take a skeptical and dim
view.
the prosecutors must also notify the defendant of the grand jury materials that it will
use in the case-in-chief at trial as covered by Rule 16(a)(1)(E)(ii) (material the
government intends to use in its case-in-chief at trial). In view of the massive
number of documents, the Court rejected the prosecutors argument that the turn over
of the documents was all that Rule 16 required. The Court reasoned:
Given the enormous volume of material produced in this case
and defendants limited resources, it is apparent that requiring
defendants counsel to peruse each page of the materials at issue here
in effect, to duplicate the work of document review presumably
already done by the government would materially impede
defendants counsels ability to prepare an adequate defense or, as
repeatedly emphasized by defendants counsel at oral argument, to
evaluate meaningly the governments plea offer and to engage in
fruitful plea negotiations.
****
1734
See statement of Commissioner Everson, reported at Allen Kenney, Telecom Tycoon

Charged With Evading $200 Million in Taxes, 2005 TNT 39-1, 2005 TNT 39-1.
- 776 -
The governments obligation to identify the material that it

intends to use in its case-in-chief at trial parallels the defendants
obligation under Rule 16(b)(1)(A), which requires a defendant
seeking discovery under Rule 16(a)(1)(E) to afford the government
the opportunity to inspect and copy material that is within the
defendants possession, custody, or control and that the defendant
intends to use . . . in the defendants case-in-chief at trial. As this
Court previously has held, the governments possession of documents
that a defendant intends to use in the defendants case-in-chief does
not eliminate the defendants duty to disclose those documents and
identify them as such under Rule 16(b)(1)(A). The defendant cannot
satisfy that obligation simply by providing the government with the
thousands of pages of discovery [he] received from the government
and stating that the documents upon which [he] intends to rely are
found somewhere therein. United States v. Hsia, 2000 WL 195067,
at *1 (D.D.C. Jan. 21, 2000). The reverse must also be true. A
reciprocity of obligations between the defendant and the government
clearly is consistent with the intent of the Rules Advisory Committee,
which in 2002 specifically amended Rule 16(b)(1)(B) to track the
similar language in revised Rule 16(a)(1). FED. R. CRIM. P. 16
Advisory Committee Note to 2002 Amendment. In short, for the
intended reciprocity to be effectuated, the government must identify
what it intends to rely on in its case-in-chief at trial before the
defendant must identify what he intends to rely on in his.
****
It is in both Mr. Andersons and the governments interest
that the defendant be able to mount an adequate defense and/or
engage in meaningful plea discussions, and it is the Courts view that
the identification and production of the requested information will
help to ensure that he can. For these reasons, the Court will grant
plaintiffs motion under Rule 16, insofar as it seeks the identification
of which grand jury materials the government intends to use in its
case-in-chief. Again, this Order will not prevent the government from
using evidence not previously identified for limited purposes such as
refreshing recollection, impeachment and rebuttal, so long as the use
of that evidence was not planned in advance of trial. Neither will the
granting of plaintiffs motion under Rule 12 and Rule 16 preclude
defendant from seeking further discovery if, on the basis of the
material identified, defendant believes he is entitled to it.
My comment on the Anderson order is bravo to the Courts recognition that the mass
document dump gambit gives prosecutors an unfair advantage, the harm in which can be mitigated
by the tools available to the Court under the discovery and related rules.
- 777 -
Similar issues are presented in mass document dumps that, the prosecutors claim, meet their
Brady and Giglo obligations. I discussed that specific issue earlier beginning at p. 680. I strongly
recommend that the reader review that discussion now, particularly the quote presented in that
discussion which offers a significantly different nuance.
3.
Other Matters.
The defendant must give notice of alibi or insanity defense.1735 Alibi is rarely applicable in
a tax case; insanity could be a defense to criminal culpability but is not usually applicable because
the Government would have explored sanity in the investigation if it appears that the taxpayer were
likely to raise this defense and would have probably declined to pursue prosecution if it were
reasonably possible to be a real issue.
You determine in this example that your client has neither an alibi nor an insanity defense.
4.
Local Rules.
Finally, defendants counsel should be aware of the local rules of court. 1736 Be sure also
when checking the local rules to see if the particular judge that has been assigned has his or her own
rules.
E.
Judge or Jury Trial.
The taxpayer will want to have considered whether to waive his right to a jury trial. This is
one of the tougher issues one will face. Most practitioners consider a jury trial as the default
preference, requiring strong reasons to waive a jury. And, then, of course, even if the defendant
waives trial by jury, the Government can demand a jury trial, although in practice the Government
rarely would demand a jury. Consider the following from an astute group of tax crimes practitioners
and a judge who was formerly a leader in the tax crimes defense bar:
Criminal defendants have a constitutional right to a trial by jury but can
waive that right and opt for a bench trial. That's not very common, however. Paula
M. Junghans of Zuckerman Spaeder LLP said she's at times considered asking a
client to waive that right, but ultimately has never done it. For the government to
convince one person . . . is a challenge, but convincing 12 people is harder, she said
at the criminal tax fraud and tax controversy conference sponsored by the American
Bar Association Section of Taxation and Criminal Justice Section.
Giving the prosecutor's perspective, Alka Sagar, an assistant U.S. attorney for
the Central District of California, said it's going to be difficult for the government to
insist on a jury trial when the defendant has waived that right. She said that in her
1735
1736
FRCrP Rules 12.1 and 12.2.

In the Southern District of Texas, the local rules are published on the courts web site.
- 778 -
district, a prosecutor must get permission from the front office to not agree to a
bench trial.
If the defendant wants to waive jury, it's usually better for the government,
she said. The case is a lot more streamlined, you get to present more of your case
to the judge, [and] judges in bench trial usually will allow all evidence to come in.
Junghans said a defendant risks a lot, procedurally, by waiving a jury trial. It takes
out of the equation the possibility of reversible error based on, generally, evidentiary
ruling, and certainly on jury instruction. I don't want to give all that up, she said.
Judge Marvin J. Garbis of the U.S. District Court for the District of
Maryland, paraphrasing legendary Baltimore lawyer Morris Kaplan, remarked, A
criminal trial from the bench is a long guilty plea. That does not mean a bench trial
should be avoided at all costs, Judge Garbis said, giving the example of a defendant
preserving an issue, such as a motion to suppress, without being able to secure a
conditional plea. By informing the judge up front, a defendant may be able to accept
responsibility without actually accepting responsibility, he said. But, he advised, By
and large, take the jury, and you get the benefit of the judge also.
Steven R. Toscher of Hochman, Salkin, Rettig, Toscher & Perez PC told Tax
Analysts that in rare cases it may be in the defendant's interest to opt for a bench
trial, especially if that defendant is not a sympathetic person and the government has
a weak case. That can occur occasionally in criminal tax trials, he said, as many
defendants are wealthy and a jury may feel strongly about the alleged crimes.1737
A related topic is picking the jury. The considerations in making the decision whether to
waive a jury are closely related to the considerations in actually picking a jury at the start of the trial.
Indeed, both prosecution and defense should have anticipated how each would pick a jury if the jury
trial is not waived. Picking up from the same article:
Picking a jury for a tax trial, however, is not easy, Junghans said. One might
presume that with complex trials involving sophisticated financial transactions, a
defendant would want a jury equally sophisticated that understands how the
transactions work. But that does not always work in the defense's favor, she said,
citing a recent trial she litigated involving a complex transaction and a finance-savvy
jury that nevertheless ended in a conviction.
Tax trials can be especially complicated for a lay person to understand,
particularly those that involve highly structured transactions. Charles J. Muller of
Chamberlain, Hrdlicka, White, Williams & Aughtry said a lawyer can better
convince a jury by simplifying the issues. You have to be a storyteller, he said.
You have to relate your case in a way that is easy for the jury [to understand]. And
1737
Shamik Trivedi, For Tax Trials, Jury Selection is a Complicated Matter, 2012 TNT
239-2 (12/12/12).
- 779 -
perhaps more than anything an attorney can say or do, a jury's decision can come
down to how it reacts personally to the defendant, he said.
Toscher said the economic makeup of the jury is important too. The jury will
identify with one side or the other, and "in a lot of these cases, the jury pool comes
from a different economic strata than your client," he said. That's a problem. That's
an obstacle. Toscher said he prefers to have jurors who are businesspeople, who
understand the pressures of record and bookkeeping.
The defense always has a more difficult time picking a jury, said J. Lee
Meihls, a jury consultant and president of Trial Partners Inc. in Beverly Hills, Calif.
Meihls, who has assisted both the government and the defense in picking over 350
juries, including those for criminal trials involving Michael Jackson, R. Kelly, and
Robert Blake, agreed with Muller, and said it always comes down to how each
prospective juror reacted to the defendant.
Although juror questionnaires give some insight into how a jury may react,
more than anything, it is the juror's personal feeling and reaction to a defendant, she
said. There's an art and a science, after so many years [of doing] jury selections,
Meihls said.
Judge Garbis remarked that a defense lawyer doesn't select a juror as much
as he or she strikes a prospective juror. And when it comes to striking a juror from
the pool for a criminal tax case, as much as the defense wants a juror that can
identify with the defendant, the government typically wants just the opposite.
Sagar said she looks for W-2 wage earners, who have to pay taxes, because
they are subject to withholding -- jurors who are like the shoppers she encounters at
her local Costco store, because those types of individuals can identify more with the
prosecution than with a wealthy defendant on trial for tax crimes. On the other end,
Sagar said, she'd prefer not to have the person "driving a Ferrari pulling up at the
Ritz Carlton. . . . Those are the people I prosecute."1738
V.
Trial.
A.
Introduction.
The outcome of a trial is not the truth, but the truth as the fact finder determines based upon
the evidence presented, the law as presented to the fact finder (by instruction in the case of a jury)
and how that evidence and how the law plays with the fact finders life experience. Truth in any
objective sense is not the issue, for the trial may have played out in a way that misses that mark.
(We dont like to think that, but that is the truth.)
1738
Shamik Trivedi, For Tax Trials, Jury Selection is a Complicated Matter, 2012 TNT
239-2 (12/12/12).
- 780 -
B.
Focus on the Theme of the Case.1739
The most important element of trying any case is the theme. The theme guides you in
questioning witnesses and using exhibits. Examples of principal themes used in tax cases are
mistake, inadvertence, good faith and reliance on others.
1.
Rules concerning themes.
2.
The themes must be simple.

The themes must be credible.
The themes must be repeated early and often.1740
The themes must be supported by some evidence (both testimonial
and through exhibits). In construing the evidence exercise reason and
judgment so that you do not hack off the jury.
The themes must be referred to in the instructions. The judge usually
makes the decision as to the instructions to be given at the close of
the evidence. In anticipating what instructions will be given so that
you can develop your theme during trial, you must be reasonable in
your expectations as to the instructions you can expect the judge to
give. It would be bad to develop a theme as to which the judge gives
no instructions or, worse, an adverse instruction.
The themes must be referred to in closing arguments.
Examples of Themes.
The Government has not been fair in the conduct of its investigation.
In tax cases, this sub-theme may be developed, for example, by
showing sloppiness and inferring vindictiveness in overreaching tax
calculations.
The defendant has accepted responsibility for the taxes.
The defendant has already paid a heavy price (public embarrassment,
strain and stress on family, costs incurred to deal with this).
IRS has gotten / will get its pound of flesh via penalties and interest.
1739
The presentation in this subparagraph is inspired by and sometimes drawn verbatim

from Charles M. Meadows and Harvey M. Silets, The Trial of a Criminal Case, pp. H-12 - H-14,
published in an ABA publication titled Criminal Tax Fraud 2004. Mr. Meadows granted me
permission to use these materials.
1740
Louis Howe (campaign manager for Franklin D. Roosevelt) is reported to have said:
If you say a thing often enough, it has a good chance of becoming a fact." Jonathan Alter, The
Defining Moment: FDR's Hundred Days and the Triumph of Hope (Simon & Schuster 2006). This
rule is true in trials as well, although discretion must be exercised when the theme veers to far from
the truth.
- 781 -
3.
Expert testimony regarding traits in the defendants personality /

behavior that mitigate his culpability (if not wipe it out altogether as
in a successful insanity defense).
Be (or Appear to Be) Reasonable to the Judge and Jury.
You (the lawyer) must appear reasonable (do not hack the judge or jury off). This is totally
within your control (except as you might face an aberrational judge or juror).
A corollary rule is to avoid preposterous positions which not only make the jury dislike you
(the lawyer) and thus the client, but can even suggest to the judge or jury that the client is guilty.
Consider the following:
The district court also mentioned that Whatever doubt I may have had
regarding the defendants' knowledge of the ultimate purpose of the invoices was
dispelled by the very nature of the defense and the preposterous effort to prove that
these [false] invoices, in fact, reflected some aspect of reality. Of course, it is
improper to consider mere argument, no matter how good or bad, as evidence in
support of a conviction. See United States v. Riccio, 529 F.3d 40, 43-45 (1st Cir.
2008); see also 1st Cir. No. 3.08 Pattern Crim. Jury Instr.(1998)(Arguments and
statements by lawyers are not evidence.) As the issue is not raised on appeal, we
simply decline to consider this as evidence in the context of this challenge to the
sufficiency of the evidence.1741
Effective lawyering is about credibility and the broader subject of persuasion. Your client
loses if you are not credible or persuasive.
4.
Make the Defendant a Sympathetic Figure.
You should make the defendant a sympathetic figure (if you can).1742
C.
Trier of fact.
1.
Judge.
a.
Judge Selection.
As you will recall from the discussion of the Sentencing Guidelines, a federal judge has
considerable discretion to set the sentences, although at the extremes the discretion is limited.
1741
United States v. Marek, 548 F.3d 147, 154 n.9 (1st Cir. 2008) (emphasis supplied).
An example in which making the defendant appear to be a sympathetic figure was
an uphill and ultimately unsuccessful task is United States v. Helmsley, 941 F.2d 71 (1991), cert
denied, 502 U.S. 1091 (1991), involving the, by media reputation, Queen of Mean (see Wendt v.
Wendt, 1998 Conn. Super. LEXIS 1023, 35 (1998))
1742
- 782 -
Moreover, during the trial process, the judge has considerable discretion that can substantially
influence the final outcome of the case, even if the jury is the final decision-maker as to innocence
or guilt. If a party could select the judge, that party might be thereby to influence the final outcome
more favorably to its desired result.
Neither the Government nor the taxpayer has the right to select the judge who will try the
case. In most districts, cases are assigned randomly or in some other way designed to limit the
possibility of judge selection.
b.
Influencing the Judges Discretion.
Getting the best benefit for the client means that you should do those things necessary to
influence the judge to make his discretionary calls in your clients favor. We are not talking here
about bribery or threats, but about the more subtle things that will influence the judge. Sometimes,
it may mean associating a counsel known to be in favor with the judge, particularly if you are an
attorney from outside the district. In all events, it will mean learning a lot about the judge so that
you will know the tactics to which he responds favorably or unfavorably. Remember that you are
trying to influence an audience at trial the audience is the trial judge and the jury and they respond
differently. The audience, of course, is not the casual courtroom audience looking for a show or
even the press if news is so light that they find a tax case interesting. The audience is the judge and
the jury.
c.
District Selection.
Although neither party can select the judge of their choice. The Government does have some
ability to select a favorable district. You will recall that, under the venue rules, in many tax cases,
the Government has several different districts in which it can indict. In the garden variety tax
evasion case by false return, the Government can indict in the district in which the false return is
prepared, mailed or filed and, if not within those choices, the taxpayers district of residence. The
Government usually indicts in the taxpayers district of residence.
The taxpayer has no ability to influence the Governments choice of district. There are
limited opportunities, however, to transfer venue if the Government agrees or undue prejudice in the
district of indictment is shown.1743
2.
Jury.
a.
Right to Jury Trial.
The default rule is that criminal cases are tried to a jury unless the defendant waives trial by
jury, the Government consents and the court agrees.1744
1743
1744
FRCrP Rules 20 and 21.

FRCrP Rule 23(a).
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b.
Number of Jurors.
The default rule is that juries consist of 12 members, but that the parties may consent to a
lesser number with the approval of the court.1745
c.
Jury Selection.
The parties have no control over the pool of persons from whom the jury will be selected.
Some limited information about the persons within the pool will be available to the parties.
There will be a process known as voir dire, to make an examination of prospective jurors or
witnesses under oath to determine their competence or suitability. FRCrP Rule 24 permits the court
to make the examination and allows the court to permit counsel for the parties to make some or all
of the examination of the jury pool.1746 If the court does not permit counsel for the parties to make
the examination, it will consider requests as to questions to ask.
The district court may dismiss any prospective juror for cause based on the voir dire. In a
noncapital felony criminal case, the prosecution has 6 peremptory challenges and the defendant(s)
has 10.1747
d.
Opening Instructions for Context.
The judge will give the jury opening instructions so that they will have a context for what
follows. Some variation of the following opening instruction from the Fifth Circuit Pattern Jury
Instructions will be given:
1.01 PRELIMINARY INSTRUCTION
Members of the Jury:
You are now the jury in this case. I want to take a few minutes to tell you
something about your duties as jurors and to give you some instructions. At the end
of the trial I will give you more detailed instructions. You must follow all of my
instructions in doing your job as jurors.
This criminal case has been brought by the United States government. I may
sometimes refer to the government as the prosecution. The government is
represented at this trial by an assistant United States attorney, _______. The
defendant, _______, is represented by an attorney, _______.
1745
FRCrP Rule 23(b).

The defendant is not entitled to have his attorney conduct the examination. Hamer
v United States, 259 F.2d 274 (9th Cir. 1958), cert den 359 US 916 (1959), reh den 359 US 962
(1959); Fox v United States 296 F.2d 217 (5th Cir. 1961) , cert den 369 US 888 (1962).
1747
FRCrP Rule 24(b)(2).
1746
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The defendant has been charged by the government with a criminal violation
of a federal law, [e.g., having intentionally sold heroin]. The charge against the
defendant is contained in the indictment. The indictment is simply the description
of the charge made by the government against the defendant, but it is not evidence
that the defendant committed a crime. The defendant pleaded not guilty to the
charge. A defendant is presumed innocent and may not be found guilty by you
unless all twelve of you unanimously find that the government has proved
defendant's guilt beyond a reasonable doubt. [Addition for multidefendant cases:
The defendants are being tried together. But you will have to give separate
consideration to the case against each defendant. Each is entitled to your separate
consideration. Do not think of them as a group.]
The first step in the trial will be the opening statements. The government in
its opening statement will tell you about the evidence which it intends to put before
you, so that you will have an idea of what the government's case is going to be. Just
as the indictment is not evidence, neither is the opening statement evidence. Its
purpose is only to help you understand what the evidence will be and what the
government will try to prove.
After the government's opening statement, the defendant's attorney may make
an opening statement. [Change if the defendant reserves his statement until later or
omit if the defendant has decided not to make an opening statement.] At this point
in the trial, no evidence has been offered by either side.
Next, the government will offer evidence that it claims will support the
charges against the defendant. The government's evidence may consist of the
testimony of witnesses as well as documents and exhibits. Some of you have
probably heard the terms circumstantial evidence and direct evidence. Do not
be concerned with these terms. You are to consider all the evidence given in this
trial.
After the government's evidence, the defendant's lawyer may [make an
opening statement and] present evidence in the defendant's behalf, but the lawyer is
not required to do so. I remind you that the defendant is presumed innocent and that
the government must prove the guilt of the defendant beyond a reasonable doubt.
The defendant does not have to prove his innocence. If the defendant decides to
present evidence, the government may introduce rebuttal evidence.
After you have heard all the evidence on both sides, the government and the
defense will each be given time for their final arguments. I just told you that the
opening statements by the lawyers are not evidence. The same applies to closing
arguments. They are not evidence either, but you should pay close attention to them.
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The final part of the trial occurs when I instruct you about the rules of law
which you are to use in reaching your verdict. After hearing my instructions, you
will leave the courtroom together to make your decision. Your deliberations will be
secret. You will never have to explain your verdict to anyone.
Now that I have described the trial itself, let me explain the jobs that you and
I are to perform during the trial.
I will decide which rules of law apply to this case, in response to questions
or objections raised by the attorneys as we go along, and also in the final instructions
given to you after the evidence and arguments are completed. You must follow the
law as I explain it to you whether you agree with it or not.
You, and you alone, are the judges of the facts. Therefore, you should give
careful attention to the testimony and exhibits, because based upon this evidence you
will decide whether the government has proved, beyond a reasonable doubt, that the
defendant has committed the crime(s) charged in the indictment. You must base that
decision only on the evidence in the case and my instructions about the law. You
will have the exhibits with you when you deliberate.
[If desired, insert here instruction entitled NoteTaking by Jurors.]
It will be up to you to decide which witnesses to believe, which witnesses not
to believe, and how much of any witness's testimony to accept or reject. I will give
you some guidelines for determining the credibility of witnesses at the end of the
case.
The defendant is charged with _______. I will give you detailed instructions
on the law at the end of the case, and those instructions will control your
deliberations and decision. But in order to help you follow the evidence I will now
give you a brief summary of the elements of the offense which the government must
prove to make its case. [It is suggested that a discussion of the elements of the
offense be inserted here.]
During the course of the trial, do not talk with any witness, or with the
defendant, or with any of the lawyers in the case. Please do not talk with them about
any subject at all. You may be unaware of the identity of everyone connected with
the case. Therefore, in order to avoid even the appearance of impropriety, do not
engage in any conversation with anyone in or about the courtroom or courthouse.
It is best that you remain in the jury room during breaks in the trial and not linger in
the halls. In addition, during the course of the trial do not talk about the trial with
anyone elsenot your family, not your friends, not the people with whom you work.
Also, do not discuss this case among yourselves until I have instructed you on the
law and you have gone to the jury room to make your decision at the end of the trial.
Otherwise, without realizing it, you may start forming opinions before the trial is
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over. It is important that you wait until all the evidence is received and you have
heard my instructions on rules of law before you deliberate among yourselves. Let
me add that during the course of the trial you will receive all the evidence you
properly may consider to decide the case. Because of this, do not attempt to gather
any information on your own which you think might be helpful. Do not engage in
any outside reading on this case, do not attempt to visit any places mentioned in the
case, and do not in any other way try to learn about the case outside the courtroom.
Now that the trial has begun, you must not read about it in the newspapers or
watch or listen to television or radio reports of what is happening here. The reason
for these rules, as I am certain you will understand, is that your decision in this case
must be made solely on the evidence presented at the trial.
At times during the trial, a lawyer may make an objection to a question asked
by another lawyer, or to an answer by a witness. This simply means that the lawyer
is requesting that I make a decision on a particular rule of law. Do not draw any
conclusion from such objections or from my rulings on the objections. These relate
only to the legal questions that I must determine and should not influence your
thinking. If I sustain an objection to a question, the witness may not answer it. Do
not attempt to guess what answer might have been given had I allowed the question
to be answered. Similarly, if I tell you not to consider a particular statement, you
should put that statement out of your mind, and you may not refer to that statement
in your later deliberations. If an objection is overruled, treat the answer like any
other.
During the course of the trial I may ask a question of a witness. If I do, that
does not indicate I have any opinion about the facts in the case. Nothing I say or do
should lead you to believe that I have any opinion about the facts, nor be taken as
indicating what your verdict should be.
During the trial I may have to interrupt the proceedings to confer with the
attorneys about the rules of law which should apply here. Sometimes we will talk
here, at the bench. Some of these conferences may take time. So, as a convenience
to you, I will excuse you from the courtroom. I will try to avoid such interruptions
as much as possible and will try to keep them short, but please be patient, even if the
trial seems to be moving slowly. Conferences outside your presence are sometimes
unavoidable.
Finally, there are three basic rules about a criminal case which you should
keep in mind.
First, the defendant is presumed innocent until proven guilty. The indictment
against the defendant brought by the government is only an accusation, nothing
more. It is not proof of guilt or anything else. The defendant therefore starts out
with a clean slate.
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Second, the burden of proof is on the government until the very end of the
case. The defendant has no burden to prove his innocence, or to present any
evidence, or to testify. Since the defendant has the right to remain silent, the law
prohibits you in arriving at your verdict from considering that the defendant may not
have testified.
Third, the government must prove the defendant's guilt beyond a reasonable
doubt. I will give you further instructions on this point later, but bear in mind that
in this respect a criminal case is different from a civil case.
Thank you for your attention.
D.
Burden of Proof.
The Government must prove each element of each offense charged. The Due Process Clause
requires that the trier of fact find the proof persuasive beyond a reasonable doubt.1748
We have discussed above that, despite this traditional formulation of the rule, there will be
instances in which life experience will have the effect of shifting the burden to the defendant in a
criminal trial as to some element or component of an element or perhaps relaxing what quantum of
proof is sufficient to find beyond a reasonable doubt. For example, in a tax evasion case where the
tax due and owing is established by the net worth method, if the defendant asserts a substantial cash
hoard at the beginning of the period or a nontaxable receipt during the period that the Governments
net worth calculation does not take into account, the defendant as a practice matter will have the
burden with respect to the issue, even though a purist would say that the Government must disprove
the existence of the cash hoard or nontaxable receipt.
I present the jury instructions as to burden of proof below in its appropriate slot in the time
line.
E.
Witnesses.
1.
Government Witnesses.
a.
IRS Agent as Summary and/or Expert Witness
I have previously discussed the Governments use of the IRS Agent (either Special or other
type of agent) as a summary witness or expert witness. Please review those materials.1749
1748
See In re Winship, 397 U.S. 358, 364 (1970) (stating that it is critical that the moral
force of the criminal law not be diluted by a standard of proof that leaves people in doubt whether
innocent men are being condemned.)
1749
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b.
Other Government Witnesses.
The Government will also have other witnesses at trial.

I discussed Brady and Jencks Act required disclosures above. After each witness for the
Government testifies, it will be particularly important to ask for their statements if they have not
been previously requested or produced. Also, a reminder that, as discussed in the Brady and Giglio
discussion above, defense counsel should at least consider cross-examining a witness as to his or her
untruthfulness with respect to his or her tax returns. FRE 608(b) gives the trial judge broad latitude
in allowing or disallowing this cross-examination, so defense counsel will want to exercise care in
pursuing it.
With these materials and the other facts the competent defense counsel has been able to
discover, defense counsel will then make judgment call whether to cross-examine and how to
cross-examine the witnesses.
In addition, if there are still legal uncertainty issues lurking in the case a la Garber and
similar cases, you may try to flesh that out from the Government witnesses, particularly the Special
Agent who testifies. The Special Agent is frequently not a real expert in the tax law, and may
succumb to subtle cross examination over the legal basis for the conclusions.
2.
Defense Witnesses.
a.
Defense Summary Witnesses.
Just as the Government can use summary witnesses, so can the defense. For example, in a
complex tax case where the Government uses a summary witness to establish the net worth method
of reconstructing taxable income, the taxpayer could have a summary witness making different
calculations or even countering problems in the Governments proffered summary.
b.
Defendant as Witness.
Of course, probably the key witness question facing the defense is whether the defendant will
testify. That decision is based on experience, a reading of the trial judge and jury, and careful
preparation with the defendant to project how he would appear.
F.
Time Line for Trial.

1.
Opening - The Introduction to the Case.

a.
Judges Instructions.
The Judge will instruct the jury on its role in the case and give an introduction to the case.
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b.
Parties Opening Statements.
The parties may make opening statements. The prosecution will go first, giving the jury an
overview of the case it intends to prove. The defense will follow with its view of the case.
Sometimes, the defense will reserve its opening argument until it presents the defense case in chief.
2.
Governments Case.
a.
Introduction.
The prosecution proceeds first to introduce its evidence. The prosecution will continue until
it rests its case.
b.
Example of Evidence Issues.
United States v. David S. Bok, 157 F.3d 157 (2d Cir. 1998)
****
II. Similar Acts
Also at issue is one of the trial judges evidentiary rulings. Over Boks
objection, the government introduced evidence at trial of other similar acts by Bok,
specifically his failure to file a state personal tax return for 1988 as well as the failure
of Abacus and its predecessor corporation to file federal and state corporate returns
for the years during and after those in the indictment. On appeal we must decide
whether such evidence of similar acts was admissible to prove Boks knowledge and
intent, and whether the trial court properly admitted such evidence in the
governments case in chief on the assumption that the defendant would argue that he
lacked the requisite intent for conviction. District courts enjoy broad discretion in
admitting evidence of similar acts; to find an abuse of that discretion we must be
persuaded that the trial judge ruled in an arbitrary and irrational fashion. * * * * We
hold that the trial judge did not abuse his discretion here, and therefore the admission
of this similar act evidence in the governments case in chief was permissible.
Rule 404(b) of the Federal Rules of Evidence governs the admissibility of
evidence on other crimes, wrongs, or acts, permitting its admission for purposes
including proof of . . . intent [or] knowledge while prohibiting its admission to
prove the character of a person in order to show action in conformity therewith.
Fed. R. Evid. 404(b); * * * *. We take an inclusive approach to other acts
evidence: it can be admitted for any purpose except to show criminal propensity,
unless the trial judge concludes that its probative value is substantially outweighed
by its potential for unfair prejudice. * * * *.
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Both 7201 and 7206(1) require that the government prove that the
defendant acted willfully. And the Supreme Court has made clear that in order to
avoid snaring people in the tangled net of the tax code solely due to their
incompetence, willfulness under the tax laws requires a voluntary, intentional
violation of a known legal duty. Cheek v. United States, 498 U.S. 192, 200- 01*
* * (1991) (quoting United States v. Bishop, 412 U.S. 346, 360 * * * (1973)); * * *
*. As we have often explained, a defendants past taxpaying record is admissible to
prove willfulness circumstantially. * * * *. As a simple matter of logic, Boks failure
to file state or federal returns for either himself or his corporations until told to do so
by the IRS is indicative of an intent to evade the tax system. This is particularly true
in light of Boks legal education, which included coursework in both corporate and
personal taxation.
Although it is generally the favored practice for the trial court to require the
government to wait before putting on its similar act evidence until the defendant has
shown that he will contest the issue of intent, * * * such evidence is admissible
during the Governments case-in-chief if it is apparent that the defendant will dispute
that issue, * * * *. In this case, before the admission of the evidence, Bok had
proposed instructions that concerned intent, and in Boks cross examination of his
accountant, Bok had suggested that his reliance on the accountant effectively negated
his willfulness. The trial court was therefore well within its discretion in allowing the
introduction of evidence of similar acts when it did.
----------------------------3.
Motion for Judgment of Acquittal.
The defendant may move for judgment of acquittal at the conclusion of the Governments
case or at the conclusion of all the evidence.1750 The motion essentially argues that, taking the
Governments case as the Government has presented it, no reasonable jury could conclude beyond
a reasonable doubt that the defendant was guilty of a crime. These motions are rarely granted but
do serve as a check on abuse of the Governments power to indict. (OK, you purists will say, it is
the grand jury that indicts, but really I mean, really it is the prosecutor who except in rare cases
really makes that decision.
4.
Defendants Case.
If the Governments case is still standing after the Government presents its case, the
defendant will then present its evidence.
1750
FRCrP Rule29. Rule 29(b) permits the court to reserve decision on the motion even
until after the jury verdict.
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5.
Governments Rebuttals.
The Government may then present evidence in favor of a conviction. Usually, the new
evidence addresses matters that arose in the defendants defense in chief. If the Government could
have anticipated the need for the evidence in advance, it likely would have admitted its evidence in
its case-in-chief, but sometimes for strategic reasons the Government will want to get the defendant
committed to a particular view of the facts which often happens only during the defendants case-inchief and then spring its contrary view of the facts.
The taxpayer may then renew its motion for acquittal, again on the ground that a reasonable
jury could not find each element of the offense charged beyond a reasonable doubt.1751 Again, such
motions are usually denied.
6.
Closing Argument.
The parties will then make their closing arguments. Before doing that, the judge will again
instruct the jury as to the purpose of this phase of the trial. The judge will say the expected things
such that arguments are not evidence and that the arguments should be credited only to the extent
(1) persuasive, (2) consistent with the facts they heard in the trial, and (3) consistent with the law
as the judge will instruct the jury in making the submission of the case to the jury.
The prosecution then goes first, arguing the facts and the law that, in its view, support a
finding of guilt for each element of each charged count. The defense goes next, arguing that the
facts and the law do not support a finding of guilt beyond a reasonable doubt for each element of
each charged count. The prosecution will then make a short rebuttal.
7.
Instructions.
a.
Introduction.
The judge will then instruct the jury. As a predicate for this, the judge will have required the
parties to have submitted proposed jury instructions. Each party will present to the judge proposed
jury instructions designed to be consistent with (1) the facts at trial, (2) the law, and (3) that partys
view of the case. The judge will make the decision as to the actual jury instructions to give.
b.
Charge Specific Instructions.
The judge will then actually present the jury instructions. We have presented specific
examples of jury charges in discussing the statutory crimes.
1751
FRCrP Rule 29.
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c.
General charges.
A sample of general charges in criminal cases that also appear in criminal tax cases are (from
the Fifth Circuits Pattern Jury Instructions):
(1)
Introductory Charges.
1.03 INTRODUCTION TO FINAL INSTRUCTIONS

Members of the Jury:
In any jury trial there are, in effect, two judges. I am one of the judges; the
other is the jury. It is my duty to preside over the trial and to decide what evidence
is proper for your consideration. It is also my duty at the end of the trial to explain
to you the rules of law that you must follow and apply in arriving at your verdict.
First, I will give you some general instructions which apply in every case, for
example, instructions about burden of proof and how to judge the believability of
witnesses. Then I will give you some specific rules of law about this particular case,
and finally I will explain to you the procedures you should follow in your
deliberations.
(2)
Duty to Follow Instructions.
1.04 DUTY TO FOLLOW INSTRUCTIONS

You, as jurors, are the judges of the facts. But in determining what actually
happenedthat is, in reaching your decision as to the factsit is your sworn duty
to follow all of the rules of law as I explain them to you.
You have no right to disregard or give special attention to any one
instruction, or to question the wisdom or correctness of any rule I may state to you.
You must not substitute or follow your own notion or opinion as to what the law is
or ought to be. It is your duty to apply the law as I explain it to you, regardless of
the consequences.
It is also your duty to base your verdict solely upon the evidence, without
prejudice or sympathy. That was the promise you made and the oath you took before
being accepted by the parties as jurors, and they have the right to expect nothing less.
(3)
Presumption of Innocence.
This charge is quoted above.1752

1752
See p. 692.
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(4)
Excluding NonEvidence.
1.06 EVIDENCEEXCLUDING WHAT IS NOT EVIDENCE

As I told you earlier, it is your duty to determine the facts. In doing so, you
must consider only the evidence presented during the trial, including the sworn
testimony of the witnesses and the exhibits. Remember that any statements,
objections, or arguments made by the lawyers are not evidence. The function of the
lawyers is to point out those things that are most significant or most helpful to their
side of the case, and in so doing to call your attention to certain facts or inferences
that might otherwise escape your notice. In the final analysis, however, it is your
own recollection and interpretation of the evidence that controls in the case. What
the lawyers say is not binding upon you.
During the trial I sustained objections to certain questions and exhibits. You
must disregard those questions and exhibits entirely. Do not speculate as to what the
witness would have said if permitted to answer the question or as to the contents of
an exhibit. Also, certain testimony or other evidence has been ordered stricken from
the record and you have been instructed to disregard this evidence. Do not consider
any testimony or other evidence which has been stricken in reaching your decision.
Your verdict must be based solely on the legally admissible evidence and testimony.
Also, do not assume from anything I may have done or said during the trial
that I have any opinion concerning any of the issues in this case. Except for the
instructions to you on the law, you should disregard anything I may have said during
the trial in arriving at your own findings as to the facts.
(5)
Direct and Circumstantial Evidence.
1.07 EVIDENCEINFERENCESDIRECT AND CIRCUMSTANTIAL

While you should consider only the evidence, you are permitted to draw such
reasonable inferences from the testimony and exhibits as you feel are justified in the
light of common experience. In other words, you may make deductions and reach
conclusions that reason and common sense lead you to draw from the facts which
have been established by the evidence.
ALTERNATIVE A
Do not be concerned about whether evidence is direct evidence or
circumstantial evidence. You should consider and weigh all of the evidence that
was presented to you.
ALTERNATIVE B
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In considering the evidence you may make deductions and reach conclusions
which reason and common sense lead you to make; and you should not be concerned
about whether the evidence is direct or circumstantial. Direct evidence is the
testimony of one who asserts actual knowledge of a fact, such as an eye witness.
Circumstantial evidence is proof of a chain of facts and circumstances indicating
that the defendant is either guilty or not guilty. The law makes no distinction
between the weight you may give to either direct or circumstantial evidence.
Note
Alternative B is provided for judges who prefer to explain the distinction
between direct and circumstantial evidence.
(6)
Witness Credibility.
1.08 CREDIBILITY OF WITNESSES

I remind you that it is your job to decide whether the government has proved
the guilt of the defendant beyond a reasonable doubt. In doing so, you must consider
all of the evidence. This does not mean, however, that you must accept all of the
evidence as true or accurate.
You are the sole judges of the credibility or believability of each witness
and the weight to be given the witness's testimony. An important part of your job
will be making judgments about the testimony of the witnesses [including the
defendant] who testified in this case. You should decide whether you believe all or
any part of what each person had to say, and how important that testimony was. In
making that decision I suggest that you ask yourself a few questions: Did the person
impress you as honest? Did the witness have any particular reason not to tell the
truth? Did the witness have a personal interest in the outcome of the case? Did the
witness have any relationship with either the government or the defense? Did the
witness seem to have a good memory? Did the witness clearly see or hear the things
about which he testified? Did the witness have the opportunity and ability to
understand the questions clearly and answer them directly? Did the witness's
testimony differ from the testimony of other witnesses? These are a few of the
considerations that will help you determine the accuracy of what each witness said.
[The testimony of the defendant should be weighed and his credibility
evaluated in the same way as that of any other witness.]
Your job is to think about the testimony of each witness you have heard and
decide how much you believe of what each witness had to say. In making up your
mind and reaching a verdict, do not make any decisions simply because there were
more witnesses on one side than on the other. Do not reach a conclusion on a
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particular point just because there were more witnesses testifying for one side on that
point.
Note
Obviously, the language in brackets should be used only if the defendant has
testified. The last two sentences of the instruction are not intended for use when the
defendant has not presented any testimony.
(7)
Character Evidence.
1.09 CHARACTER EVIDENCE

Where a defendant has offered evidence of good general reputation for truth
and veracity, or honesty and integrity, or as a law-abiding citizen, you should
consider such evidence along with all the other evidence in the case.
Evidence of a defendant's reputation, inconsistent with those traits of
character ordinarily involved in the commission of the crime charged, may give rise
to a reasonable doubt, since you may think it improbable that a person of good
character in respect to those traits would commit such a crime.
You will always bear in mind, however, that the law never imposes upon a
defendant in a criminal case the burden or duty of calling any witnesses or producing
any evidence.
(8)
Impeachment - Prior Inconsistencies.
1.10 IMPEACHMENT BY PRIOR INCONSISTENCIES

The testimony of a witness may be discredited by showing that the witness
testified falsely concerning a material matter, or by evidence that at some other time
the witness said or did something, or failed to say or do something, which is
inconsistent with the testimony the witness gave at this trial.
Earlier statements of a witness were not admitted in evidence to prove that
the contents of those statements are true. You may consider the earlier statements
only to determine whether you think they are consistent or inconsistent with the trial
testimony of the witness and therefore whether they affect the credibility of that
witness.
If you believe that a witness has been discredited in this manner, it is your
exclusive right to give the testimony of that witness whatever weight you think it
deserves.
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(9)
Consider Only Crime Charged.
1.19 CAUTIONCONSIDER ONLY CRIME CHARGED

You are here to decide whether the government has proved beyond a
reasonable doubt that the defendant is guilty of the crime charged. The defendant is
not on trial for any act, conduct, or offense not alleged in the indictment. Neither are
you concerned with the guilt of any other person or persons not on trial as a
defendant in this case.
(10)
Judge Imposes Punishment.
1.20 CAUTIONPUNISHMENT
If a defendant is found guilty, it will be my duty to decide what the
punishment will be. You should not be concerned with punishment in any way. It
should not enter your consideration or discussion.
(11)
Multiple Counts.
1.21 SINGLE DEFENDANTMULTIPLE COUNTS

A separate crime is charged in each count of the indictment. Each count and
the evidence pertaining to it should be considered separately. The fact that you may
find the defendant guilty or not guilty as to one of the crimes charged should not
control your verdict as to any other.
d.
Specialized Charges.
Either party may request special charges based upon the facts in dispute at trial and the law
that relates to such facts.
(1)
Theory of Defense
Often, the defense requests special charges related to a theory of its defense. The right to
a theory of defense instruction is a basic tenet of criminal law, provided that the theory is a legally
valid one and there is evidence in the record to support it. Thus, it is not uncommon to seek special
instructions going to a Cheek good faith defense. Consider the following from United States v.
Chavin:1753
1753
316 F.3d 666 (7th Cir. 2002).
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1. Theory-of-Defense Jury Instruction

Chavin and Litwin argued as part of their defense to the tax-fraud charges
that they relied in good faith on the advice of Chavin's accountant Kessler and
therefore did not willfully perpetrate the tax fraud. Defendants tendered a
theory-of-defense jury instruction that covered this point. The district court,
however, refused to give the instruction to the jury, stating that the theory of defense
was sufficiently covered by other instructions; specifically, by the pattern instruction
on good faith and a further instruction that made clear that defendants must have
acted willfully within the precise definition of that term.
We review a district court's refusal to give a theory- of-defense instruction
de novo. United States v. Meyer, 157 F.3d 1067, 1074 (7th Cir. 1998). To be
entitled to a theory of defense instruction, a defendant must satisfy a four-part test
by showing (1) that the proposed instruction is a correct statement of law; (2) that the
evidence in the case supports the theory of defense; (3) that the theory of defense is
not already part of the charge; and (4) that failure to include the proposed instruction
would deny the defendant a fair trial. Id.
Here, defendants have, at the very least, failed to satisfy the third element.
We have recognized in prior tax-evasion cases that a 'good faith reliance' defense
is essentially a claim that the [defendant] did not act 'willfully.' United States v.
Brimberry, 961 F.2d 1286, 1291 (7th Cir. 1992). Consequently, when, as here,
instructions are given that require the jury to find that a defendant acted willfully
and those instructions define willfulness and good faith as mutually exclusive,
then a further good faith reliance theory-of-defense instruction would be
unnecessarily redundant. Id.; United States v. Kelley, 864 F.2d 569, 573 (7th Cir.
1989). Therefore, we find that the instructions given by the district court adequately
covered the defendants' theory of defense.
In considering the foregoing, keep in mind that the Court was not saying that it would be
error to give the requested charge. All the Court held was that it was not error not to give the
charge. Accordingly, upon request, a trial court may well give this type of instruction even though
it is redundant to some degree.
e.
Government Risk on Charges.
If the Government gets a favorable jury charge and there is a conviction, the taxpayer can
appeal after the sentencing to attack the verdict on the basis that the erroneous jury instruction
affected the verdict. If, however, the taxpayer gets a favorable jury instruction and is acquitted, the
Government has no practical remedy. There avenues of a Government mid-trial appeal to remedy
the allegedly erroneous instruction are limited.1754
1754
See United States v. Farnsworth, 456 F.3d 394 (3d Cir. 2006), discussed in this
context in Anne Bowen Poulin, Government Appeals in Criminal Cases: The Myth of Assymetry,
- 798 -
8.
The Verdict.
The jury will then retire for deliberation.

If the jury can reach a verdict based on the judges instructions, the jury will so advise the
judge and the case will be convened in the court for the jury to present its verdict.
9.
Abuses.
United States v. Evangelista, 122 F.3d 112 (2d Cir. 1997)
(For facts, see above at beginning on p. 146)

C. Improper Prosecutors Comment.
During the governments cross-examination of Reffsin, Evangelista, Sr.
audibly answered yes in response to the prosecutors pending question. The
prosecutor reacted by saying: I call Louis Evangelista to the stand. Judge Wexler
immediately told the prosecutor to sit down, and admonished Evangelista, Sr. to
keep [his] mouth quiet. Then, at defense counsels request, Judge Wexler
convened a side-bar with all counsel, and promptly thereafter instructed the jury: A
statement was made by the defendant and a statement was made by the prosecution.
Disregard them both. I think that it was in the heat of excitement where it came out,
it should not have come out. They were both wrong. So disregard it. The defense
made no contemporaneous objection to the courts curative instruction.
The Evangelistas claim that this egregious act of prosecutorial misconduct
. . . . amounted to a deliberate effort to undermine [their] constitutional rights not
to testify, and was in no way cured by the District Courts instruction to the jury.
Appellants Brief at 40.
This Court has stated that inappropriate prosecutorial comments, standing
alone, would not justify a reviewing court to reverse a criminal conviction obtained
in an otherwise fair proceeding[;] . . . such remarks must be examined within the
context of the trial to determine whether the prosecutors behavior amounted to
prejudicial error. * * * *. In making this assessment, this Court has focused
primarily on three factors: the severity of the misconduct, the measures adopted to
cure it, and the certainty of conviction in the absence of the misconduct. * * * *.
Under this standard, the prosecutors comment--while plainly improper--does
not warrant reversal. We agree with the government that the comment ultimately had
no prejudicial effect on Evangelista, Sr., or on his son Claude, when considered in
77 U. Cin. L. Rev. 1 (2008).

- 799 -
light of the district courts immediate curative instruction and the weight of evidence
against both defendants.
The severity of the prosecutors single improper statement was also
mitigated somewhat in this case because the remark appears to have been an
aberration in an otherwise fair proceeding. Id. Most of the cases in which we have
reversed convictions as a result of prosecutorial misconduct have involved repeated
improper statements whose aggregate effect was more likely to undermine the
fairness of the trial. Id. The prosecutors statement here had no bearing on the
credibility of the defense witness on the stand at the time, or on the validity of the
evidence against the Evangelistas. We emphasize that there is no one-free-bite rule
for prosecutors, but the record reflects and supports Judge Wexlers view that the
comment was a heated, momentary response to provocation rather than a tactical
move. In short, the prosecutors comment is an insufficient ground for reversal.
----------------------------VI.
Post-Trial.
A.
Post-Trial Motions.
The defendant will have available the standard post-trial motions new trial, etc.1755
B.
Pre-Sentence Investigation Report.
If the defendant is convicted as to any count, the Probation Office will prepare a
Pre-Sentence Investigation Report (PSR). We reviewed the PSR before, but summarize the key
points here: The PSR will contain all relevant factors known to the probation officer that should
affect sentencing, a summary of the statutory and Sentencing Guidelines sections applicable, and
a calculation of the sentencing level. Both sides may heavily lobby for inclusions and exclusions
from the PSR. Although a number of factors will be considered and included, a key factor in tax
cases is the tax loss number. I have already presented above how that number is calculated
considering only the criminal numbers and considering relevant conduct even if unindicted or
acquitted. This will be a battleground in the preparation of the PSR.
It is best if all the parties can agree upon the content of the PSR. Busy judges will then have
the assurance that the proposal in the PSR fairly balances the competing interests of the Government
and the defendant and have been independently reviewed and approved by the Probation Office
which has the duty to present any significant factors that have not been fairly treated by the parties.
If complete agreement cannot be achieved, the parties should work hard to narrow their differences
with the PSR. The parties will then have an opportunity at the sentencing to present their views on
those differences and have the judge resolve the disagreements.
1755
E.g., FRCrP Rule 33.
- 800 -
C.
Sentencing.
As noted above, the Probation Office will submit a PSR to the court to assist the court in
sentencing. The goal is to have an agreed PSR or at least one as to which neither party objects.
If either party does not agree with any portion of the PSR, that party may contest that portion and
any disputes are resolved at the sentencing hearing. Factual disputes are resolved on a
preponderance of the evidence standard (not the beyond a reasonable doubt in the criminal case in
chief). Disputes in the application of the Sentencing Guidelines are resolved by the judge based on
his or her legal determinations.
D.
Appeal.
The defendant will have the usual opportunities to appeal. Appeals from the conviction and
sentence are called direct appeals. (To distinguish them from collateral attacks discussed below.)
Key points (some of which are review) regarding appeals are:
First, the taxpayer may appeal from errors that substantially affected the trial phase
proceedings below. These errors can range the gamut from insufficiency or variance of the
indictment, evidentiary errors, procedural errors, erroneous instructions to the jury, etc.
Second, the taxpayer may appeal from the sentencing. Please refer to the discussion in the
sentencing chapter regarding appeals.1756
During the pendency of the appeal (including petition for certiorari to the Supreme Court),
the defendant is required to begin his or her sentence of incarceration unless the court finds (1) by
clear and convincing evidence, that the defendant is not likely to flee or pose a danger to the safety
of another person or the community, and (2) the appeal is not for delay and raises a substantial
question of law or fact likely to result in reversal, an order for new trial, a sentence that does not
include a term of imprisonment, or a sentence reduced to a term of imprisonment less than the total
of the time already served plus the expected duration of the appeal process.1757 FRCrP Rule 9 allows
prompt appellate review of a district court decision to deny release pending appeal of the conviction
or sentence. The court of appeals may order release on that prompt request or order release later
before decision on the substantive issues, after reviewing the briefs or hearing oral argument on the
substantive issues if it determines that there is a substantial issue involved that might require reversal
or further proceedings.
E.
Post-Appeals Remedies (Collateral Attacks; Expungement).
The defendants post-appeal remedies are limited. At some point litigation must cease and
the result accepted (regardless of whether it is right or wrong in any purist sense). Nevertheless,
certain collateral attack remedies are available.
1756
1757
See text beginning on p. 371.

18 U.S.C. 3143(b).
- 801 -
The most commonly used collateral attack where the convicted defendant is in custody is via
28 U.S.C. 2255 which is a statutory successor to the common law writ of habeas corpus procedure,
although it is not the same.1758 Section 2255 permits relief for the sentence imposed on convicted
defendants who are in custody in the following situations: (1) the sentence was imposed in violation
of the Constitution or federal law; (2) the sentencing court did not have jurisdiction to impose
sentence; (3) the sentence exceeded the maximum allowed by law; and (4) the sentence is otherwise
subject to collateral attack. Despite the breadth of the language, not every alleged violation is
cognizable under 2255. Rather, they must involve a fundamental defect which results in a
complete miscarriage of justice.1759 Attacks on the effectiveness of counsel, for example, are
usually pursued as a collateral attack under 2255 rather than on the direct appeal.1760
Some types of collateral attacks may also be pursued under 28 U.S.C. 2241, also a type of
habeas corpus procedure.1761 This procedure applies where the 2255 motion would be inadequate
or ineffective.1762 Since 2255 are generally deemed adequate to preserve legitimate attacks on
convictions and sentences, this procedure is generally not available for those attacks, so the use of
this procedure is circumscribed.
In rare and exceptional circumstances, the writ of coram nobis may provide relief for persons
who are not in custody where there is no other available remedy.1763 The error(s) complained of via
1758
For a good summaries, see see Allan Ellis and James H. Feldman, Jr., A 2255 and
2241 Primer, 26 Champion 26 (2002); and Brent E. Newton, A Primer on Post-Conviction Habeas
Corpus Review, 29 Champion 16 (2005).
1759
Davis v. United States., 417 U.S. 333, 346 (1974). An attack on restitution is not
permitted in a 2255 proceeding. United States v. Kramer, 195 F.3d 1129, 1130 (9th Cir. 1999)
([Section] 2255's language clearly and unambiguously limits its applicability to defendants seeking
release from custody. It is not available to those . . . who challenge only fines or restitution orders.);
Barnickel v. United States, 113 F.3d 704, 706 (7th Cir. 1997) (holding that " 2255 is not available
to challenge an order of restitution imposed as part of a criminal sentence"); Blaik v. United States,
161 F.3d 1341, 1343 (11th Cir. 1998) ([W]e hold that 2255 cannot be utilized by a federal
prisoner who challenges only the restitution portion of his sentence because 2255 affords relief
only to those prisoners who claim[] the right to be released from custody.).
1760
Massaro v. United States, 535 U.S. 500, 504-505 (2003) (holding that generally, a
motion brought under 2255 is preferable to direct appeal for deciding claims of
ineffective-assistance because the district court is the forum best suited to developing the facts
necessary to determining the adequacy of representation during an entire trial). See also, e.g.,
United States v. Galloway, 316 F.3d 624, 634 (6th Cir. 2003); and United States v. Jake, 281 F.3d
123, 132 n. 7 (3d Cir. 2002). Some courts, however, allow this issue to be presented on the direct
appeal in rare cases when the record before the court has fully developed the issue. E.g., United
States v. Barnes, 324 F.3d 135 (3d Cir. 2003).
1761
For a good summary, see see Allan Ellis and James H. Feldman, Jr., A 2255 and 2241
Primer, 26 Champion 26 (2002).
1762
Id.
1763
Brent E. Newton, A Primer on Post-Conviction Habeas Corpus Review, 29 Champion
16 (2005); see United States v. Dyer, 136 F.3d 417, 422 (5th Cir. 1998) (no other available remedy).
- 802 -
this writ must not have been known or reasonably knowable at an earlier stage where a more
appropriate remedy of the types discussed above would have worked and the error(s) must continue
to cause fundamental injustice even after release from custody.1764
Finally, there may be a narrow microscopically narrow -- window of opportunity to obtain
an expungement of a criminal conviction. The authority to expunge is not granted by statute and
thus runs squarely into the general rule that federal courts are courts of limited jurisdiction.
Nevertheless, some courts have found authority to expunge based upon ancillary jurisdiction. In a
recent case, the court said:
In this case, Meyer sought expungement based solely on the equitable
considerations that his employer was insured by the FDIC and that FDIC regulations
restricted the employment of individuals previously convicted of certain criminal
offenses. Meyer did not allege that his misdemeanor conviction [for failure to file
tax returns] was in any way invalid or illegal nor did he rely on any Constitutional
provision or statute authorizing either a district court or magistrate judge to expunge
his criminal conviction. A district court may have ancillary jurisdiction to expunge
criminal records in extraordinary cases to preserve its ability to function successfully
by enabling it to correct an injustice caused by an illegal or invalid criminal
proceeding. However, we conclude that ancillary jurisdiction does not extend to
expungement of a criminal conviction where the petitioner asserts solely equitable
grounds.
Permitting the expungement of a record solely on equitable grounds would
interfere with state and federal laws that rely on the existence of accurate and
complete criminal records. The federal law affecting Meyer, 12 U.S.C. 1829, is
one such example, because it restricts the eligibility of an individual who has been
convicted of any criminal offense involving dishonesty or a breach of trust or money
laundering to work at FDIC-insured institutions. Moreover, ordering the Executive
Branch to expunge its records contravenes the statute requiring the Attorney General
to preserve records. We agree with the Ninth Circuit that the expungement of the
record of a valid arrest and conviction usurps the powers that the framers of the
Constitution allocated to Congress, the Executive, and the states. For obvious and
quite important reasons, Congress has recognized the critical nature of preserving
criminal records and has specified the use and effect of certain criminal convictions.
Allowing a district court to expunge criminal records based solely on equitable
considerations, without an express grant of authority from Congress, would
undermine these goals.1765
So, it appears that expungement is available where the other post-conviction remedies are
not available and the convicted person is able to establish some basis going to the integrity of the
1764
Id.
United States v. Meyer, 439 F.3d 855, 861-862 (8th Cir. 2006) (footnotes and citations
in text omitted for readability).
1765
- 803 -
process, other than purely equitable factors. Note that, from the quote, the holding is jurisdictional
so that a party seeking expungement must aver ab initio some basis other than equitable factors to
justify expungement. The case says that employment limitations are equitable factors which do not
grant jurisdiction. The case leaves to another day (or days) the parameters of the equitable limitation
on the courts ancillary jurisdiction on a motion for expungement.
Since relevance and proportionately must be considered in keeping focus in this book, I do
not further develop how the courts make this critical cut in the application of these post-conviction
remedies.
VII.
Relief for the Acquitted.

A.
Attorneys Fees - The Hyde Amendment.
Legislation commonly referred to as the Hyde Amendment,1766 allows a prevailing party

in a criminal case to recover attorneys fees and litigation expenses from the government in cases
where the governments position was vexatious, frivolous, or in bad faith. The Hyde Amendment
is the criminal counterpart to the Equal Access to Justice Act (EAJA), 28 U.S.C. section 2412,
which authorizes courts to award attorneys fees and costs in most civil cases. In civil tax taxes,
Section 7430 covers the recovery of attorneys fees.
The fees and expenses that may be recovered include those incurred in the criminal
prosecution itself and also those incurred incident to the preceding criminal investigation, including
the IRS phase of the investigation.
Unlike EAJA and Section 7430, the defendant must prove that, not only did he prevail, but
that the governments position was vexatious, frivolous or in bad faith. Merely prevailing -- i.e.,
being acquitted in a criminal prosecution or a government dismissal of the indictment -- is not alone
sufficient to make the required showing of vexatious, frivolous or in bad faith. More must be shown.
And then, even where the defendant makes those showings, a court may still nevertheless deny the
request for attorneys fees if it finds that special circumstances make the awarding of such fees
unjust.
The amount recoverable is computed based on the hours spent and a statutory rate which is
probably less than the better criminal defense attorneys charge. For this reason, contingency fees
which are not based on times can be tricky in conjunction with the requirement that the fees be
incurred. Thus, a contingency fee that is less than the amount that could be awarded will set a cap
on the award, because those are the only fees the defendant incurs. However, a contingency fee that
turns out to be in excess of the hourly based fee may be scaled back.1767
1766
P.L. 105-119, Title VI section 617, 111 Stat. 2440, 2519 (1997).
United States v. Claro, 579 F.3d 452 (5th Cir. 2009) (in this case, the contingency
arose in Hyde Amendment proceedings and was 40% of the amount of attorneys fees and costs
awarded under the Hyde Amendment)..
1767
- 804 -
B.
Certificate of Innocence and Damages.
A wrongfully convicted and may sue for damages arising from the incarceration under
certain very narrow conditions specified in 28 U.S.C. 2513 and 1495. The conditions are:
2513. Unjust conviction and imprisonment
(a) Any person suing under section 1495 of this title [28 U.S.C. 1495] must
allege and prove that:
(1) His conviction has been reversed or set aside on the ground that
he is not guilty of the offense of which he was convicted, or on new trial or rehearing
he was found not guilty of such offense, as appears from the record or certificate of
the court setting aside or reversing such conviction, or that he has been pardoned
upon the stated ground of innocence and unjust conviction and
(2) He did not commit any of the acts charged or his acts, deeds, or
omissions in connection with such charge constituted no offense against the United
States, or any State, Territory or the District of Columbia, and he did not by
misconduct or neglect cause or bring about his own prosecution.
A recent case summarized the scope of this relief as follows:
Thus, the plain language of 2513 requires that one seeking a certificate of
innocence (who has not been pardoned) prove three predicates. He must prove that
(1) the record . . . of the court setting aside or reversing his conviction
demonstrates that it did so on the ground that he is not guilty of the offense of which
he was convicted, 2513(a)(1); (2) he did not commit any of the acts charged or
those acts constituted no crime against the United States, or any State, Territory or
the District of Columbia, 2513(a)(2); and (3) he did not by misconduct or neglect
cause or bring about his own prosecution, id.
After setting forth these three requirements, 2513 specifically characterizes
them as requisite facts. 2513 (b). Then, the statute expressly sets forth the only
way (again absent pardon) that a person can demonstrate these requisite facts in
the Court of Federal Claims by a certificate from the court in which such facts are
alleged to appear. Id. This intricate statutory scheme renders several conclusions
inescapable.
First, Congress clearly did not provide in the unjust conviction and
imprisonment act an avenue for monetary compensation to all whose criminal
convictions are reversed after incarceration. Rather, the phrasing of the Act and its
legislative history proclaim the care with which its framers guarded against opening
wide the door through which the treasury may be assailed by persons erroneously
convicted. Congress enacted this statute to provide only certain innocent persons
the ability to present a claim for financial indemnity upon showing their
innocence. Section 2513 compensates only the truly innocent. n2
- 805 -
n2 The legislative history of 2513 clearly demonstrates a congressional

desire to limit the class of persons entitled to relief under the statute. In
commenting on the proposed legislation, Attorney General Homer
Cummings noted that [i]deal justice would seem to require that in the rare
and unusual instances in which a person who has served the whole or part of
a term of imprisonment, is later found to be entirely innocent, he should
receive some redress. The Attorney General went on to distinguish the
entirely innocent, who would merit a certificate of innocence, from those
who would not the more frequent[ ] cases in which reversal was based
on the ground of insufficiency of proof or on the question as to whether the
facts charged and proven constituted an offense under some statute.1768 Id.
He concluded that any proposed legislation should necessar[ily] . . . separate
from the group of persons whose convictions have been reversed, those few
who are in fact innocent of any offense whatever.
Second, and just as clear as its intent to permit only the truly innocent to
receive a 2513 certificate, Congress expressly directed that one seeking the
certificate bear the burden of not only alleg[ing] but also prov[ing] entitlement
to the certificate. 28 U.S.C. 2513(a). Moreover, because it constitutes a waiver of
sovereign immunity, the unjust conviction statute has always been strictly construed.
Thus, 2513 imposes a rigorous burden on those who seek a certificate of
innocence.
Third, as every court to consider the question has held, the decision to deny
a certificate of innocence is committed to the sound discretion of the district court.
Accordingly, we review a district court's denial of a certificate of innocence for
abuse of discretion, and must affirm that decision unless the court abused its
discretion, or unless the findings underlying its decision were clearly erroneous.
When a district judge has exercised his substantial discretion to deny a certificate of
innocence, we cannot require him to stultify himself by certifying an opinion
contrary to his real conviction no matter what our own view might be except,
perhaps, in a case in which the refusal to certify innocence was completely
capricious and without rational basis.1769
VIII. Incarceration.
Because as in the case of most federal crimes, as the statistics noted above show, the
overwhelming number of tax crimes that are charged result in a conviction. Accordingly, attention
early on in the process must focus on the Sentencing Guidelines. As an adjunct to that, particularly
1768
For a case holding that insufficiency of proof will not suffice in the absence of
affirmative showing of innocence, see United States v. Racing Servs., Inc., 580 F.3d 710, 712 (8th
Cir. 2009).
1769
United States v. Graham, 608 F.3d 164 (4th Cir. 2010) (case citations omitted and
quotation marks in some cases omitted for readability).
- 806 -
as sentencing approaches, the practitioner must spend some time preparing the convicted client for
incarceration if required by the sentence. Persons convicted of tax crimes will often qualify for the
prisons with less severe confinement environments dare I say country club prisons which is a bit
of a euphemism. This subject is beyond any detailed exposition here, but just be aware that there
are certain pro active things that can be done in the process to make convicted defendants better
candidates for these prisons.1770
And, as with all of life, the incarcerated person should make the best of his circumstance.
Consider the following discussion inspired by the incarceration of three prominent class lawyers William Lerach, Dickie Scruggs, and Mel Weiss:
When Bill Lerach, Dickie Scruggs, and Mel Weiss check into prison, each
will be handed a uniform, photographed, fingerprinted, and asked to disrobe for a
mandatory cavity search. Whatever personal property they have will be taken from
them and inventoried. It will either be held until their release or shipped back home.
Inmates families often report being startled when civilian clothing lands
unannounced on their doorstep a few weeks after their loved one was incarcerated.
Other former white-collar convicts have plenty of advice for Scruggs, Lerach
& Weiss. Webster Hubbell, who served 16 months for bilking the Rose Law Firm out
of some $450,000, says that future inmates shouldnt expect a country club. The
stories of long ago, where there are tennis courts and swimming pools, just arent
true, says Hubbell. Still, Hubbell tried to make the most of the experience.
According to Todd, he exercised daily and dropped nearly 100 pounds while he was
in prison. You try to get the years back on the back end, he says.
Alan Ellis, a Bay Area lawyer who specializes in post-conviction work
advises clients to treat prison time as a sabbatical. You can take those two years and
add five years to your life physically, mentally, and spiritually, he says.1771
IX.
When All Else Fails The Presidential Pardon.
The Constitution provides: The President . . . shall have Power to grant Reprieves and
Pardons for Offenses against the United States, except in cases of Impeachment.1772 This power
includes the power to pardon for a convicted crime and to pardon prospectively for a crime that has
been or might be charged.1773 This power also includes the prospective commutation of a sentence
1770
Alan Ellis is a leading practitioner in this niche area of the law of sentencing and
post-conviction law and has written extensively on this subject. You can find useful resources,
including key guidebooks, in this area at his website.
1771
As Bill Lerach Reports to Prison . . . A Look at What Awaits , Wall Street Journal
Law Blog (5/19/2008) (internal cites and quotes omitted).
1772
Article II, section 2, clause 1.
1773
The quintessential example of the prospective pardon for crimes not yet charged was
the pardon granted to former President Nixon by then President Ford after President Nixon resigned,
- 807 -
not yet served,1774 although more frequently pardons as to convicted crimes come after the sentence
has been served. This power is often not consciously considered in the process of representing a
person alleged to have offended the tax system or convicted of having done so. I suspect that this
is principally because most tax persons in the prosecutors sights do not present the type of factors
that would offer a reasonable prospect for a presidential pardon.
Since the Presidents power to pardon is plenary and not subject to review (except in the
proverbial court of public opinion), there is no roadmap to the factors that the President or his
advisors through whom requests for pardon are normally vetted consider in determining whether to
pardon. However, history has shown that there can be any number of factors including mercy and
politics that moves the process.1775
Since mercy is or should be the prime mover of the pardon power, I hope you will
indulge me the following quote from Shakespeare where the character Portia sums up the quality
of mercy in the executive branch (with apologies to my reader for Shakespeares brush with antiSemitism):
The quality of mercy is not strained.
It droppeth as the gentle rain from heaven
Upon the place beneath. It is twice blest:
It blesseth him that gives, and him that takes.
'Tis mightiest in the mightiest. It becomes
The throned monarch better than his crown.
thus making Ford the President. In the tax universe, the quintessential example of a pardon for
crimes charged but not tried was the pardon President Clinton granted to the elusive fugitive
billionaire Marc Rich.
1774
Samuel T. Morison, The Politics of Grace: On the Moral Justification of Executive
Clemency, 9 Buff. L. Rev. 1, 32 n. 63 (2005); Margaret Colgate Love, Reviving the Benign
Prerogative of Pardoning, 32 ABA Litigation 25, 26 (Winter 2006). The commutation of
uncompleted sentences is akin to the parole process; indeed, Parole grew out of pardon, though it
never entirely replaced it. Love, supra, p. 27. As you know from our study of the Sentencing
Guidelines, however, parole is now abolished in the federal system and thus this safety valve
complement to the pardon power is no longer present. As a result of its absence, one would have
thought that the number of pardons would increase but, as I note in the text later, it has not.
1775
Samuel T. Morison, The Politics of Grace: On the Moral Justification of Executive
Clemency, 9 Buff. L. Rev. 1, 3 (2005) (quotation marks and footnotes omitted).
Even the defenders of the pardon power appear willing to concede that it is often
beyond the effective reach of rational moral justification, and attempt to fend off the
critics by arguing that clemency decisions do not, after all, require any such
justification. As one sympathetic commentator recently put it, the president has a
duty to pardon, not just where moral desert has been established in a particular case,
but also as a more general obligation of office. This latter aspect of the duty to
pardon is neither grounded in nor limited by considerations of law and morality, but
is essentially one of politics.
- 808 -
His sceptre shows the force of temporal power,

The attribute to awe and majesty,
Wherein doth sit the dread and fear of kings;
But mercy is above this sceptred sway.
It is enthroned in the hearts of kings;
It is an attribute to God himself,
And earthly power doth then show likest God's
When mercy seasons justice. Therefore, Jew,
Though justice be thy plea, consider this:
That in the course of justice none of us
Should see salvation. We do pray for mercy,
And that same prayer doth teach us all to render
The deeds of mercy. I have spoke thus much
To mitigate the justice of thy plea,
Which if thou follow, this strict court of Venice
Must need give sentence 'gainst the merchant there.
Every President should as should we all read or, better still, hear this when acting on requests
for forgiveness.
Too often other factors move Presidents to pardon. When that happens, the pardon power
which can be the executives finest moments may be turned into their worst moments. For example,
the Special Prosecutor investigating Henry G. Cisneros, a player in the Clinton administration,
recently stated in his report:
On January 20, 2001, his last day in office, President Clinton pardoned or commuted
the sentence of almost every individual whose conviction had been secured by an
independent counsel during his Presidency. Cisneros and Medlar received full
pardons for all the offenses to which they had pleaded guilty.1776
President Clinton also pardoned the elusive billionaire Marc Rich pre-conviction while he remained
a fugitive from justice (a hardly appealing factor), for which Clinton received the criticism he justly
deserved. These instances of the pardon power are frequently viewed as abuses, but one close
observer of the process views the pardons as a systemic failure in the process that left President
Clinton without the necessary input to exercise the power properly.1777
Nevertheless, these other factors have caused many to view the pardon power cynically. One
defender of the benefits of pardons has noted:
1776
Final Report of Independent Counsel, In re Henry G. Cisneros, IV-218 & IV-219

(2004). This Report is unofficially reproduced at 2006 TNT 13-14, with the text cited at par. IV.D.8,
since page numbers do not appear in the TNT report).
1777
Margaret Colgate Love, The Pardon Paradox: Lessons from Clintons Last Pardons,
32 Capital L. Rev. 185 (2002).
- 809 -
Pardon is a mysterious, alien presence that hovers outside the legal system.
It is capable of undoing years of criminal investigation and prosecution at the stroke
of a pen, but it is of questionable present-day relevance even for criminal law
practitioners. Pardon is like a lightning strike or a winning lottery ticket, associated
with end-of-term scandals and holiday gift giving. It is capricious, unaccountable,
inaccessible to ordinary people, easily corrupted, and regarded with deep suspicion
by politicians and the public alike. To the extent that scholars think about it, pardon
is regarded as a constitutional anomaly, not part of the checks-and-balances package,
a remnant of tribal kingship tucked into Article II that has no respectable role in a
democracy. One of pardons few friends in the academy, Daniel T. Kobil, has called
it a living fossil.
Unkindest cut of all, pardon is not taken very seriously as an instrument of
government. Even President Clintons final pardons now are recalled more as an
embarrassing lapse of judgment than as a genuine abuse of power. His successors
pardoning has been meager and meaningless. A lot of state governors dont use their
pardon power at all. Indeed, it appears that the only two incumbent chief executives
who approach their pardoning responsibilities with any amount of proper respect are
Governor Robert Ehrlich of Maryland and President Josiah Bartlet of The West
Wing.
****
The irony of it all is that, fossil or no, pardon is still assigned a surprisingly
important part in the justice system of almost every U.S. jurisdiction. Condemned
criminals are directed to the pardon process when the law mandates a punishment
that judge and jury consider too harsh, or when courts have no authority to consider
changed circumstances. Prisoners must seek executive clemency if they want to go
home to care for orphaned children, or to die. People who have completed their
sentences must apply for pardons if they want to be hired for many jobs or qualify
for many benefits, and sometimes even if they want to vote. I recently surveyed
pardoning practices throughout the United States and found that 42 states and the
federal government make pardon the exclusive remedy for most criminal offenders
seeking to mitigate the collateral penalties and disqualifications that flow from a
criminal conviction. See M.C. Love, Relief from the Collateral Consequences of a
Criminal Conviction: A State-by-State Resource Guide (Hein 2006), available in part
at www.sentencingproject.org/rights-restoration.cfm.
Yet it probably will come as no surprise that in most jurisdictions, very few
pardons or sentence commutations are granted. In most jurisdictions, average persons
cannot expect to get a pardon no matter how minor their offense, how sincere their
remorse, and how exemplary their rehabilitation. Pardons are granted on more than
a token basis in only 13 states and are a realistically available remedy in only about
half of those. A recent investigative series in the New York Times documents the
connection between the growing population of lifers in U.S. prisons and the waning
- 810 -
role of executive clemency. See Adam Liptak, To More Inmates, Life Term Means
Dying Behind Bars, N.Y. Times, Oct. 2, 2005, at A1.
Federal pardoning has gradually dried up since the Carter administration, a
process of decline that was hastened by the orgy of irregular grants with which
President Clinton capped his eight years in office. President Bushs pardoning record
has been anemic to say the least: As of January 2006 he had granted only 69 pardons
and two commutations while denying many hundreds of applications of both kinds.
Hundreds of applications are still pending in the Justice Department, some left over
from the Clinton administration.
Surely pardoning should rank among the happiest of sovereign duties
though it can also be among the most difficult when a life is at stake or public
opinion is inflamed. And there is a compelling present need for pardon because the
criminal justice system has never been more harsh and unforgiving. Aggressive
prosecution strategies and mandatory sentencing have filled our prisons to the
bursting point and tagged more than 13 million of our fellow citizens with lingering
collateral disabilities and the stigma of a criminal record. Evidently Justice Anthony
Kennedy thought so when he called on the American Bar Association in August of
2003 to consider a recommendation to reinvigorate the pardon process at the state
and federal levelsand evidently so did the ABA House of Delegates when it urged
states and the federal government the following year to expand the use of executive
clemency.1778
Recent Presidents, even the forgiving if misguided President Clinton,1779 have used their
pardon power sparingly. They do not pardon all sinners against societys criminal norms, but they
do pardon some. Ordinary tax sinners may have a great deal of difficulty getting the sponsorship
required for a pardon. Still it may be a shot. So at least consider it.
1778
Margaret Colgate Love, Reviving the Benign Prerogative of Pardoning, 32 ABA

Litigation 25, 25-26 (Winter 2006).
1779
Perhaps President Clinton was bestirred by the biblical notion that in order to receive
forgiveness for ones own sins (and President Clinton had one or two), the person must forgive
others sins. Perhaps not. Many saw the hand of politics or worse in some of his pardons. But the
power is plenary, after all, and does not have to be justified. Still as quoted in a preceding footnote,
President Clinton did try to explain his decision in terms that at least purported to offer some
reasoning, if believed by President Clinton or the reader.
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CH. 12 - SOME POLICY ISSUES

I.
Statistics and Policies Reflected in Statistics.
We have covered in these materials many of the tax policies that play out in criminal tax
investigations. I recommend that readers download the TIGTA Report, Trends in the Criminal
Investigation Divisions Enforcement Activities Showed Improvements; However, Some Goals
Were Not Attained (July 1, 2010 Reference Number: 2010-30-074). I recommend that you read the
report and pay particular attention to the graphs.
II.
Federal Tax Amnesty.

Tax Amnesty
Prepared by Staff of the Joint Committee on Taxation
JCS-2-98 (1/30/98)
I. SUMMARY OF FINDINGS
o The staff of the Joint Committee on Taxation estimates that a Federal tax
amnesty would result in a net revenue loss to the Federal Government, as presented
in the Appendix (the revenue table). This net revenue loss occurs primarily because
a Federal tax amnesty is estimated to have the long-run effect of reducing overall
taxpayer compliance with Federal tax laws. However, a form of amnesty could be
designed to contain the amount of the revenue loss to relatively modest levels.
o Present law contains certain provisions that are similar to elements of tax
amnesty programs. These provisions include the installment agreement provisions
and offers in compromise. In contrast to a tax amnesty program, however, the
present-law provisions are tailored to the situations of specific taxpayers, rather than
providing broad relief from past taxes for noncompliant taxpayers. The Internal
Revenue Service has substantially increased the use of these provisions in recent
years.
o A taxpayers decision whether to evade taxes depends in part on the
resources and efforts that the Government expends on the enforcement of existing
laws. While an amnesty may be one way to obtain taxes that have not been paid and
to bring new taxpayers into the tax system, increasing resources devoted to
enforcement and increasing the penalties for failure to comply with the tax laws are
other ways to achieve the same objectives.
o Economists generally believe that taxpayers choose a level of compliance
with the tax laws by weighing the tradeoff between compliance and evasion and
choosing the level of compliance that will lead to the highest expected level of net
benefits. Among the factors that will influence a taxpayers decision between
compliance and evasion are the probability of the evasion being detected through
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audit, the back taxes and civil and criminal penalties that will be imposed if evasion
is detected, the taxpayers ethics or degree of honesty, damage to the reputation of
the taxpayer if the evasion is detected, the taxpayers level of risk aversion, and the
perceived benefits derived from a successful evasion of taxes.
o In the standard economic model of tax evasion, the creation of an amnesty
program alone would have no effect on taxpayer behavior because the taxpayer has
chosen a level of compliance based on a rational weighing of the benefits and costs
of evasion. If these costs and benefits are not changed, the taxpayers behavior will
not change. If, however, the penalties for evasion are increased or the likelihood of
detection through audit increases, then the rational taxpayer may choose to take
advantage of the amnesty since the expected costs of previous evasion have been
increased.
o State experience with tax amnesty will not necessarily parallel the
experience that could be expected at the Federal level. First, many sources of State
tax revenues do not have Federal counterparts. Second, pre-amnesty State tax
enforcement efforts have generally been less rigorous than efforts at the Federal
level. Thus, State amnesties that are coupled with increased enforcement efforts
might be expected to be relatively more successful than a Federal amnesty because
past evasion is likely to have been more common with respect to State taxes and
taxpayers will view the increased enforcement efforts of the States as increasing the
costs of State tax evasion. Further, many State amnesties included accounts
receivable in their amnesties, which could be viewed as revenues that the State was
likely to collect in any event.
o The experience of foreign governments with amnesty programs cannot
generally be compared to the experience that might be expected in the United States.
In most foreign countries, a larger portion of the national economy escapes the tax
system than in the United States. Most foreign countries have larger underground
economies. In addition, many countries exempt transactions occurring outside the
country from taxation, creating an incentive to move untaxed profits outside the
country. Few foreign countries have the level of tax enforcement that the United
States has at the Federal level, especially with regard to the use of computer
technology and requirements of withholding and information reporting.
---------------------------------We noted above that the system has a form of tax amnesty now in the voluntary disclosure
policy.
III.
Causes of Criminal Tax Behavior.
As you can see from the behavior evidenced in the cases discussed in this text, there is no
one reason for criminal tax behavior. Yet, policy makers must ask and try to answer the question
- 813 -
of whether there are larger reasons for criminal tax behavior than can be addressed or at least
recognized. The following if from Kim M. Bloomquist, U.S. Income Inequality and Tax Evasion:
a Synthesis, reproduced in 2003 WTD 144-9 (7/28/03):
Conclusions and Policy Implications
Socrates: Here, then, is a discovery of new evils against which the guardians
will have to watch, or they will creep into the city unobserved.
Adeimantus: What evils?
Socrates: Wealth and poverty; the one is the parent of luxury and indolence,
and the other of meanness and viciousness, and both of discontent. -- Plato, The
Republic, Book IV.
A satisfactory explanation of the Cox Paradox [the paradox, based on
empirical data of a U shaped curve whereby tax noncompliance is greatest at the
upper and lower income levels, an inverted U-shaped distribution of compliance
behavior] would provide an important key to understanding the causes of income tax
evasion. The two main competing theoretical explanations for the Cox Paradox
indirectly point to income inequality as a contributing factor. Economists emphasize
the greater opportunities to evade among both the rich and poor, while behaviorists
would interpret rising economic disparity as a cause of taxpayer stress and increasing
evasion propensity. This paper tests the hypothesis that income inequality is a
determinant of income tax evasion.
Empirical results show a statistically significant relationship between a
measure of income inequality (Gini coefficient) and U.S. wage and salary reporting
noncompliance for the period 1947 to 1999. It must be stressed that this finding is
not proof of causation in the same sense that mathematical laws describe the motions
of the physical universe. Simply put, human beings are not robots, they possess free
will and can choose to obey the law or do otherwise. However, this paper has argued
that the observed positive correlation between the level of inequality and
underreporting rate is consistent with prevailing behavioral and economic theories
of tax evasion.
Although not conclusive evidence of causation, this result suggests that a
continuation of the global trend of widening economic disparity will make the job
of tax enforcement a more challenging one in the years to come. Policy makers have
a variety of options to improve compliance. Particular emphasis should be placed on
increasing the visibility of transactions by extending third-party reporting of income
where possible. Enhanced customer service and a simplified tax code should make
it easier for many taxpayers to comply. Reducing the time between an act of evasion
and its detection would make evasion less attractive as an alternative to a short-term,
high-interest loan. While the audit rate was not found to have a statistically
- 814 -
significant influence on wage and salary underreporting, this was not too surprising
given the already high probability of detection from information documents.
Taxpayer audits likely are a more effective enforcement tool when applied to income
not covered by third-party reporting, such as business net profits and capital gains.
On the other hand, tax compliance programs that negatively affect taxpayers'
financial status may have the unintended consequence of increasing, rather than
reducing, evasion. For example, if the adoption of a single flat rate tax system shifts
more of the total tax burden onto low-income households, evasion by this group of
taxpayers may increase. Alternatively, relying on the wealthy to pay for an
ever-increasing share of public goods and services may eventually provoke a Revolt
of the Haves (Citrin, 1979; Graetz, 1999). If the results reported here are an
indication, then macroeconomic policies or the lack thereof that result in a shrinking
middle class will inevitably bring about increased tax evasion.
Clearly, a topic of such importance for the design of tax policy merits further
investigation. Ideas for follow-on studies include extending this approach to other
categories of income, such as business and investment income, and substituting a
wealth-based measure of inequality for the Census Bureau's Gini coefficient.
Andreoni, Erard, and Feinstein (1998) have called for more empirical studies in
countries outside the United States. Schneider and Enste (2000) provide a good
summary of the available data to begin this work. However, their study highlights the
lack of reliable evasion data. In particular, there is a need for additional time-series
measures of evasion to identify trends that persist over several decades. Finally, a
more realistic theoretical framework would admit interdependencies among
variables. This topic seems particularly suited for carefully designed experimental
studies.
----------------------------------------------
- 815 -
APPENDIX A - RESOURCES
I offer here some resources which I have found useful in my practice.
Texts.
Ian Comisky, Lawrence Feld & Steven Harris, a two volume work with titles as follows: Tax
Fraud & Evasion: Offenses, Trials, Civil Penalties [Vol. 1] and Tax Fraud & Evasion: Money
Laundering, Asset Forfeiture, Sentencing [Vol. 2]. This is a good treatise and, in my judgment, the
best in terms of focused research for subjects covered in this class.
Robert S. Fink, Tax Controversies: Audits, Investigations, Trials (formerly Tax Fraud:
Audits, Investigations, Prosecutions). This text previously was dedicated to tax crimes but now has
been expanded to cover procedure generally. I am not familiar with the expanded text, but have
reviewed the table of contents and believe that most of the criminal subjects previously treated is
included in the expanded text.
Michael Saltzman, Tax Practice and Procedure (RIA: Warren Gorham & Lamont). This is
the standard practitioner text in this area. It is frequently cited by the courts, including the United
States Supreme Court. It deals with tax procedure generally and, although part of it covers tax
crimes, tax crimes are not treated in the detail of dedicated publications.
Periodicals.
The Champion, a publication by the National Association of Criminal Defense Lawyers.
This publication is generally lighter than most law school law reviews and is target to the white
collar criminal defense practitioner.
Tax Analysts Tax Practice Magazine is a good source for current developments and articles
related to tax procedure. These procedure-related materials are selected from Tax Analysts larger
services, including Tax Notes Today (accessible through LEXIS), Daily Tax Notes (a print service),
Tax Notes (a weekly print service, also available through LEXIS).
Other Services.
Tax Analysts offer other services that I find quite useful. I mention two which are available
on CD ROM and may be installed on your hard disk. Both of these services use the Folio Views
software, a premier software for legal publications. The Folio Views search engine is extremely
powerful and the presentation is quite good.
Tax Analysts One Disk. This CD ROM service contains the Code, the Regulations,
IRS publications, tables, Code Explanations, recent cases (recent being a number of years),
etc.
Tax Analysts Internal Revenue Manual.
- 816 -
Tax Analysts also publishes Tax Notes Today both in hard copy and web versions. I use the
web version. TNT is an excellent source for material in this area, although it covers tax matters in
general. The key features I use daily are the reports of recent decided cases (summary and full text)
and the articles and commentaries on criminal tax subjects that appear frequently.
Selected Web Sites and Blogs.
Department of Justice:
Tax Division Criminal Tax Manual (CTM) (2001 Ed.- Current):
http://www.justice.gov/tax/readingroom/2008ctm/CTM%20TOC.htm
U.S. Attorneys Manual:
www.usdoj.gov/usao/eousa/foia_reading_room/usam/
Criminal Resource Manual:
http://www.usdoj.gov/usao/eousa/foia_reading_room/usam/title9/crm00000.htm
Department of Treasury:
General: http://www.treas.gov/
TIGTA: http://www.treas.gov/tigta/
General Accounting Office: http://www.gao.gov/
IRS:
Main Web Page: http://www.irs.ustreas.gov/
Criminal Investigation Main Page:
Internal Revenue Manual:
Main Page: http://www.irs.gov/irm/index.html
Part 9 on Criminal Investigation: http://www.irs.gov/irm/part9/index.html
TIGTA produces various tax administration reports
Sentencing Law & Policy Blog: http://sentencing.typepad.com/
An excellent website for current developments in sentencing
Jack Townsends Federal Tax Crimes Blog:
http://www.federaltaxcrimes.blogspot.com/
Tax Prof Blog: http://taxprof.typepad.com/
Townsend & Jones Tax Crimes Course Page: http://www.tjtaxlaw.com/uh-tf.htm
United States Sentencing Commission:
General: http://www.ussc.gov/
White Collar Crime Prof Blog: http://lawprofessors.typepad.com/whitecollarcrime_blog/
- 817 -
APPENDIX B - GLOSSARY OF ACRONYMS, INITIALISMS & SHORT-HANDISMS1780
AAG - Assistant Attorney General, in this context, the AAG for the Tax Division,
Department of Justice.
AFMLS - DOJs Asset Forfeiture and Money Laundering Section
ATF - Treasurys Bureau of Alcohol, Tobacco and Firearms.
AUSA - Assistant United States Attorney, in the context of the materials here usually means
the local prosecutor as to a federal tax crime.
ATF - Bureau of Alcohol, Tobacco and Firearms, Department of Treasury.
BSA - Bank Secrecy Act, the Bank Records and Foreign Transaction Act, Titles 1 and II of
Public Law 91-508, as amended, codified at 12 U.S.C. 1829b, 12 U.S.C. 1951-1959, and 31 U.S.C.
5311-5330.
CAFRA - Civil Asset Forfeiture Reform Act of 2000, P. L. 106-185, 114 Stat. 202.
CATEPS - DOJ Tax Division's Criminal Appeals & Tax Enforcement Policy Section.
CBI - Caribbean Basin Initiative, the popular name for the Caribbean Basin Economic
Recovery Act f 1983.
CCE - a continuing criminal enterprise subject to 21 U.S.C. 848 (1994).
CES - Criminal Enforcement Section of the DOJ Tax. This section has the primary
responsibility for authorizing criminal tax prosecutions and setting and coordinating the
Governments criminal tax enforcement priorities.
CFEA - 18 U.S.C. 3571 (sometimes referred to as the Criminal Fine Enforcement Act of
1984 (P.L. 98-596).
CFR - Code of Federal Regulations.
CFTC - Commodity Futures Trading Commission
CI - Criminal Investigation, the branch of the IRS principally responsible tor investigating
tax crimes. This is often referred to as CID, an acronym for a prior name for this branch.
1780
See p. ii, fn. 1.
- 818 -
CMIR - Report of International Transportation of Currency or Monetary Instruments,

FinCEN Form 105, for use by any person to report the transportation into or out of the United States
of currency and certain other monetary instruments on any one occasion in excess of $10,000. This
form was formerly Form 4790.
CRL - Criminal Reference Letter, a letter from IRS CI to DOJ Taxs CES referring a case
with a recommendation of indictment or further investigation by a grand jury.
CTM - Department of Justice Tax Division Criminal Tax Manual. This key document is
available on the web in two versions: a 1994 version and a 2001 version. For the web link, see
Appendix A to this text.
CTR - Currency Transaction Report, FinCEN Form 104, for use by financial institutions to
report currency transactions exceeding $10,000. The earlier form was Form 4789. An analogous
report (Currency Transaction Report by Casinos (CTRC), Form 8362) is required for casinos.
DCC - Treasurys Detroit Computing Center where FBARs are filed.
DEA - Drug Enforcement Administration, Department of Justice.
DOJ - Department of Justice.
DOJ Tax - DOJs Tax Division.
DOJ Tax CES DOJ Taxs Criminal Enforcement Section, which is then further broken
down into large geographical units Northern, Southern and Western (the geographical divisions
may be viewed at http://www.usdoj.gov/tax/cessoump1.htm.
EOAF - Executive Office of Asset Forfeiture, Treasurys focal point for asset forfeiture
matters.
FATCA - The Foreign Account Tax Compliance Act (FATCA) was enacted in 2010 to
improve U.S. tax compliance involving foreign financial assets and offshore accounts. The
significant features are: (i) U.S. taxpayers with specified foreign financial assets that exceed certain
thresholds must report those assets to the IRS on Form 8938, filed with U.S. tax returns; and (ii)
foreign financial institutions must report directly to the IRS information about financial accounts
held by U.S. taxpayers, or held by foreign entities in which U.S. taxpayers hold a substantial
ownership interest.
FATF - Financial Action Task Force on Money Laundering, a multinational financial action
task force devoted strictly to combating money laundering by harmonizing the financial and legal
systems of its participants. The United States is a participant.
FATP - Federally Authorized Tax Practitioner Privilege under 7525 of the Code.
- 819 -
FBAR - U.S. Treasury Form 90-22.1, Report of Foreign Bank and Financial Accounts. This
form is referred to in shorthand as the Foreign Bank Account Report, hence the acronym FBAR.
FBI - Federal Bureau of Investigation, Department of Justice.
FDIC - Federal Deposit Insurance Corporation
FinCEN - Financial Crimes Enforcement Network, Department of Treasury. FinCENs
functions are discussed at p. 270.
FOIA - Freedom of Information Act, 5 U.S.C. 552, discussed at p. 674.
FRCP - Federal Rules of Civil Procedure.
FRCrP - Federal Rules of Criminal Procedure. If there is a reference to a Rule in the text
without any indication of which set of rules the reference is to, the reader should assume first that
it is to FRCrP.
FRE - Federal Rules of Evidence.
LGM - IRS Litigation Guideline Memorandum, a publication within IRS to guide as to
matters involved in litigation.
INL - Department of States International Narcotics and Law Enforcement Affairs.
IRC - Internal Revenue Code of 1986, sometimes referred to in this book as Code.
IRM - Internal Revenue Manual.
JDA - Joint Defense Agreement. JDAs are discussed in the text beginning on p. 655.
MLAT - Mutual Legal Assistance Treaty, which is a type of treaty the U.S. enters with other
governments for mutual assistance in criminal and related information matters.
MSB - Money Service Business, subject to regulation akin to financial institutions.
OVCI - IRSs OVCI initiative related to voluntarily reporting offshore financial
arrangements. The OVCI is discussed beginning on p. 564.
PSR - Presentence Investigation Report, the report prepared by the Probation Office
addressing the various sentencing factors the sentencing judge should consider in setting sentence.
Also sometimes acronymed to PSI.
IRS - Internal Revenue Service.
- 820 -
RICO - Racketeer Influenced and Corrupt Organizations Act (RICO), 18 U.S.C. 1961 et
al.
SAR - Suspicious Activity Report (SAR), this is a form, in several iterations, the various
businesses otherwise subject to reporting activity report suspicious transactions. Depository
institutions, otherwise subject to currency transaction reporting, report activities deemed suspicious
by Form TD F 90-22.47. Other types of suspicious activity reporting forms can be viewed on the
FinCEN web site at: http://www.fincen.gov/reg_bsaforms.html. This acronym (SAR) should not
be confused with the same acronym for the Special Agents Report (discussed below).
SAR - Special Agents Report. This report is prepared at the conclusion of an IRS
administrative investigation or, as to a target of a grand jury investigation, when seeking DOJ Tax
approval to seek an indictment. The SAR is the type of Prosecution Recommendation Report
prepared at the conclusion of an IRS administrative investigation. IRM 9.6.2.2.3. and 9.5.8.
SAUSA - Special Assistant United States Attorney, in this context usually meaning a DOJ
Tax CES attorney assigned to prosecute or assist in a tax or tax related prosecution in a local district.
SEC - Securities and Exchange Commission.
SOI - Summary of Investigation Report. This report is a short form Prosecution
Recommendation Report. The long form is the SAR used typically at the end of the administrative
investigation. The SOI is often used at the conclusion of a grand jury investigation.
SUA - Specified Unlawful Activity, as a component of an element of a money-laundering
crime.
TIEA - Tax Information Exchange Agreement, which is a type of treaty the U.S. enters with
other governments providing for tax information exchanges.
TIGTA - Treasury Inspector General for Tax Administration, which investigates
administration by the IRS.
USAM - United States Attorneys Manual, a DOJ publication to provide guidance to DOJ
personnel.
USAO - Unites States Attorneys Office, the DOJ local office for a district.
U.S.S.C. - United States Sentencing Commission.
U.S.S.G. - United States Sentencing Guidelines.
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FEDERAL TAX CRIMES

Revisions Through February 5, 2013

Electronic copy available at: http://ssrn.com/abstract=2212771

CREDITS AND METHODOLOGY

Townsend on Federal Tax Crimes (2013 ed. 01)

Revisions through 2/5/13

Electronic copy available at: http://ssrn.com/abstract=2212771

Notes to Students on Terms and Methodology.

Acronyms, Initialisms and Other Shorthandisms.

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I generally omit footnotes from the quoted sources.

Revisions through 2/5/13

Revisions through 2/5/13

Request for Readers Comments.

elements of the offense.

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Evasion Assessment v. Payment. . . . . . . . . . . . . . . . . 28

Townsend on Federal Tax Crimes (2013 ed. 01)

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Townsend on Federal Tax Crimes (2013 ed. 01)

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Townsend on Federal Tax Crimes (2013 ed. 01)

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Townsend on Federal Tax Crimes (2013 ed. 01)

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Townsend on Federal Tax Crimes (2013 ed. 01)

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1956 Money Laundering. . . . . . . . . . . . . . . . . . . . . . . . . . . . 261

CH. 3 - SENTENCING, PLEAS AND RELATED ISSUES. . . . . . . . . . . . . . . . . . . . . . . . . 276

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Guideline Ranges; Departures; Variances. . . . . . . . . . . . . . . 281

Townsend on Federal Tax Crimes (2013 ed. 01)

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To Group or Not to Group - That is a Question. . . . . . . . . . 328

Townsend on Federal Tax Crimes (2013 ed. 01)

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Townsend on Federal Tax Crimes (2013 ed. 01)

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CH. 4 - OTHER CONSEQUENCES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 416

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Publicity / Press Releases. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 445

CH. 5 - STATUTES OF LIMITATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 450

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Starting Point for Further Research. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 475

CH. 7 - ENFORCEMENT STRATEGIES, POLICIES AND PRACTICES . . . . . . . . . . . 476

Townsend on Federal Tax Crimes (2013 ed. 01)

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CH. 8 - INFORMATION GATHERING TECHNIQUES . . . . . . . . . . . . . . . . . . . . . . . . . . 505

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IRS Summonses and the Hague

CH. 9 - MITIGATING THE DAMAGE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 542

Revisions through 2/5/13

Events That Prevent Timeliness or

Townsend on Federal Tax Crimes (2013 ed. 01)

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Accountant Privilege. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 616

Townsend on Federal Tax Crimes (2013 ed. 01)

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Brady and Giglio. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 677

CH. 10 - PROOF ISSUES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 689

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CH. 11 - THE PROCESS A TO Z . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 754