Tax Fraud Class Update Materials

University of Houston School of Law
Tax Fraud and Money Laundering
Spring 2003
Adjunct Professors Campagna and Townsend

Update Materials and Book Errata
Last Updated: 12/19/09

These materials are intended for students of the course for supplemental reading and for updating and correcting the course book Townsend, Campagna, Johnson & Schumacher, Tax Crimes (Lexis-Nexis 2008). Jack Townsend will also periodically post items about the subject of this course on his Federal Tax Crimes Blog (although this blog is not required reading nor are the topics designed in any way to suggest what might be covered on the examination; if we feel the items discussed there are important for the class (including possible appearance on an examination, we will so indicate below on this page by Chapter).

Ch. 1 Overview of the Criminal Tax System.

Webster Commission Report in Adobe Acrobat Format. (OPTIONAL)
Text p. 14 For Updated Statistics click here.
Government Appellate Brief in Snipes click here.
Gary Becker, Nobel Prize winning economist, and Judge Richard Posner, outstanding federal judge, comments on "Why so Little Tax Evasion." The original comments may be read here. Judge Posner's comments and reader comments on his comments and his response to their comments may be read here.
Optional Assignment / Entertainment: Our Tax System is a Voluntary System.(YouTube).
TIGTA Report on IRS Enforcement Activities in FYE 2000-2008. See my blog discussion here (with links to the underlying report and highlights). The report has some interesting graphs, but that level of detail is not required for this course. For our class purposes, the following highlights should be noted:
• Although not a result of this TIGTA report, it does note that “A 2008 taxpayer attitude survey conducted by the IRS Oversight Board indicated that 9 percent of the surveyed population believed that it was acceptable to cheat on their taxes, while 89 percent said it was not at all acceptable. I have not seen the details of the methodology for that study, but would be surprised that even 9% would have said responded to a survey that it was acceptable to cheat. Who would acknowledge, even in a purportedly confidential survey, that it is OK to cheat?
• The Department of Justice acceptance rate for the Division’s prosecution cases slightly decreased to 93.6 percent from 94.6 percent in FY 2007. Similarly, the United States Attorneys’ Offices acceptance rate decreased to 89.2 percent from 90.2 percent in FY 2007.
• Total special agent staffing has decreased 6.5 percent since FY 2003, with the number of field special agents decreasing 10.7 percent over the same period. According to the Division, the number of special agents is currently at its lowest level in the past 30 years. The number of field special agents decreased almost 7 percent from 2,435 in FY 2007 to 2,271 in FY 2008.
• The Division’s goal for FY 2008 was to maintain a minimum of 48 percent direct time on legal source tax investigations and 70 percent on total tax investigations. The Division achieved its goal, spending 51.2 percent of its time on legal source tax and 70.8 percent on total tax investigations, both at a 9-year high.
• In addition, the number of subjects convicted of legal source tax crimes decreased 9 percent from FY 2007, but has increased 39 percent since FY 2003. [Note that the 1998 Webster report had recommended that more IRS resources be devoted to legal source income to support CI's primary mission to support the tax system.]
• The Report emphasizes importance of publicity – 88.5% in legal source prosecutions.

Ch. 2A Crimes Under the Internal Revenue Code - Tax Evasion

Reliance on Professional Text, p. 38. When the defendant asserts this defense, the assertion will constitute a waiver of any privilege that the defendant might otherwise have. For example, if the defendant asserts that he or she relied upon his or her lawyer, any attorney-client privilege is thereby waived, thus raising the risk that the lawyer might be required to testify against the defendant in rebuttal of the defense.
Willfulness - It's Meaning in Other Laws. For a good discussion, click here.
Deliberate Ignorance as Equivalent of Knowledge (or in a tax context, of Willfulness). In class, Larry mentioned that you might want to review Judge Posner's decision in United States v. Giovanetti, 919 F.2d 1223, 1228-1229 (7th Cir. 1990) for a pungent discussion of the deliberate ignorance concept. That concept goes by several equivalent names, such as conscious avoidance. Basically, it is a criminal law concept that where knowledge of wrongdoing is an element of a crime, that knowledge can be imputed from the defendant's conduct is consciously avoiding having the knowledge. In Giovanetti, Judge Posner discusses the dangers and limits of the concept and the instruction -- sometimes called an ostrich instruction -- by which the concept is conveyed to the jury. The key discussion from that opinion is:

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. 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 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.

The Ninth Circuit decides Boulware on remand from the Supreme Court. See the blog discussion here. The issue with which I am concerned -- the Government's use of short cuts to prove a tax due and owing is one that surfaces in areas other than the E&P area discussed in my Boulware blog. For example, as I discuss in another blog here, dealing with the admission of IRS records as substitute for direct proof of tax due and owing.

Ch. 2B Crimes under the Internal Revenue Code - Other Offenses

Errata. P. 65 - After advising the reader (and the students) that aiding and assisting is not aiding and abetting, we then state in the 2d paragraph under III.A. that "The elements of section 7206(2) aiding and abetting are described by the following jury instruction." Shame on us. It should read: "The elements of section 7206(2) aiding and assisting are described by the following jury instruction." (Emphasis supplied in both cases only to draw your attention to it for this purpose; the emphasis should not be in the text itself). Thanks to Mr. Stodghill for calling this to our attention.

Ch. 3 Crimes Outside the Internal Revenue Code

Conspiracy. OPTIONAL READING See Frank Lyon Draft Indictment. This is a draft of an indictment I prepared inspired by the charges in United States v. Stein which will figure prominently in our class discussions.

This case has been described as the largest criminal tax case in history. The indictment contains forty-five counts. Eighteen defendants await trial. The issues are complex. The evidence is mountainous. According to the latest account, the government has produced over 22 million pages in discovery, much of it in electronic form that may be used effectively only with the assistance of electronic evidence consultants. n3 No end to the document production is in sight. In addition, the government has named 68 trial witnesses n4 and identified 5,024 trial exhibits amounting to over 128,000 pages. Estimates of the duration of the trial range from a low of four to a high of eight months or more.

I have taken the charges in Stein and modified them to the facts of Frank Lyon Co. v. United States, 435 U.S. 561 (1978), a case that should be familiar to those of you who have studied substantive tax law. Frank Lyon, was a low point in Supreme Court jurisprudence -- certainly tax jurisprudence -- blessing one of the more gossamer tax shelters. The major charge in Stein -- Count One of the indictment -- is conspiracy to commit a specific offense (tax evasion) and conspiracy to defraud the United States by impairing and defeating the lawful functions of the IRS. In the text for this class, I discuss the defraud conspiracy in some detail. What I tried to do with this draft indictment in Frank Lyon is to show that the sweeping claims for the defraud conspiracy that the Government makes in the Stein case could have applied equally to the Frank Lyon facts. In Frank Lyon, the Supreme Court ultimately blessed the shelter on the tax merits. But if the Government had proceeded first by way of indictment and made the sweeping claims it makes in Stein, could it have convicted the parties on a fact pattern ultimately sustained civilly by the Supreme Court? Consider this draft indictment for what you think it may be worth in the context of the materials in the text with respect to conspiracy.

Errata. Note to Class, this is important. On p. 117, the elements of Section 1957's transaction money laundering are misstated. The following are the elements correctly stated (please mark your books to indicate that elements stated on p. 117 are incorrect). The elements of transaction money laundering are (with bold face where we make material corrections):.

1. The person must conduct or attempt to conduct a financial transaction. Financial transaction is defined quite broadly, but easily picks up the usual suspects (banking transactions).

2. The person must conduct the financial transaction with knowledge that the proceeds of unlawful activity is involved. 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.

3. The financial transaction must in fact involve the proceeds of specified unlawful activity (“SUA”). SUA is defined broadly to include the crimes that Congress thought particularly involved in organized crime, drug dealing and other national criminal enforcement priorities. 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. 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 transaction money laundering. 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. While it is DOJ policy generally not to charge mail or wire fraud where a tax specific crime can be charged and vindicates prosecution policies, the policy allows the possibility of mail or wire fraud, either as a separate charged crime, or as a predicate SUA in a money laundering offense.

4. The person must intend to (i) promote an SUA, or (ii) engage in conduct violating 26 U.S.C. § 7201 or § 7206.

5. The person must know that the transaction is designed (i) to conceal the location, nature, etc. of the proceeds of the SUA or (ii) avoid a transaction reporting requirement under state or federal law.

This problem of the elements also affects the last paragraph of the discussion on transaction money laundering on page 118 (beginning with "Finally"). We recommend that you strike the paragraph altogether and instead focus on elements 4 and 5 presented above. For purposes of this class, that tells you all you need to know. Keep in mind that the all of the elements must be met (although some can be met alternative ways as the "or" indicates in paragraphs 4 and 5.

Case: In class on 2/12/2009, Larry mentioned U.S. v. Yusuf, 536 F.3d 178 (3d Cir. 2008), cert. denied 549 U.S. 1338 (2007). In Yusuf, the defendants were charged (1) with mail fraud in defrauding the U.S. Virgin Islands of its territorial gross receipts tax and (2) with money laundering using the charged mail fraud as a predicate SUA. The issue resolved was whether the proceeds of taxes saved represented the "proceeds" of unlawful activity (see paragraph 2 of the transaction money laundering elements corrected above). The defendants alleged that the mailing of false tax returns (the predicate SUA) did not produce "proceeds" from that illegal act; it simply resulted in the defendants not turning over money in payment of the taxes they allegedly underreported. The Court held (p. 189): "we hold that unpaid 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."
Chart of Currency Reporting Forms from IRS Web Site.

Ch. 4 Methods of Proof.

For A Good Summary and Discussion of Methods of Proof. See my blog discussion of United States v. Adams (5th Cir. No. 07-60926).
What Does Beyond a Reasonable Doubt Mean? Consider the following from Judge Posner (Richard A. Posner, An Economic Approach to the Law of Evidence, 51 Stan. L. Rev. 1477, 1506-1507 (1999) (footnotes omitted).

    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.

    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.

Ch. 5 Prosecution Policies and Affirmative Defenses

Filip Memo Supersedes the Thompson Memo. Because of the furor about the Government's heavy handed use of the Thompson Memo to force waiver of the attorney client privilege and force entities to withdraw attorney-fee support from their employees or former employees, the entity prosecution policies have been revised once again, now appearing in the Filip Memorandum published in USAM Title 9, Ch. 9-28.000. For a summary of the Filip Memo, click here.

Ch. 6 Investigation and Development of Criminal Tax Cases.

USA Bulletin (Describing Interface Between DOJ Tax and the United States Attorney's Office; has excellent discussions of some DOJ Tax policies and practices.
Voluntary Diclosure Policy - IRS Offshore Bank Account Initiative Announced 3/26/09. See Jack's blog here.

Ch. 7 Government Information Gathering

Fifth Amendment Privilege - Key Issue. The key issue is whether the act that the target of compulsory process is asked to do is "testimonial" in the manner behind the Fifth Amendment guarantee. Certainly, by definition, testimony is testimonial. Some testimony may not be within the scope of a Fifth Amendment claim because it does not incriminate the witness -- e.g. the witness's name or other innocuous questions unrelated to a potential crime. Similarly, by extension, some acts that are not normally thought of as testimonial are indeed not testimonial for Fifth Amendment purposes -- e.g., requiring a witness to stand in a line up or give handwriting exemplars. But, as we see from the Hubbell case, certain acts that would not normally be thought of as testimonial may be testimonial if they infer some action of the mind of the witness that is functionally equivalent to testimony.
Fifth Amendment Privilege - Act of Production & Particularity. See blog discussion here.
Fifth Amendment -- Whether to File Returns During a Criminal Investigation. In United States v. Josephberg, ___ F.3 ___ (2d Cir. 2009), the Second Circuit discussed the limited or nonexistent opportunity to prevent a failure to file criminal case where, during the pendency of a criminal tax investigation, the taxpayer fails to file for fear that the return information my tend to incriminate. The court says that the taxpayer's only option is to claim the Fifth as to the particular item on the return that may tend to incriminate. I discuss this aspect of the case on my blog here.
Immunity - DOJ Tax CES Conferences. On page 241, we state that use immunity most often comes up in the DOJ Tax CES conferences. That is a misstatement. DOJ Tax CES conferences do not usually include any statements from the taxpayer that might be considered testimonial. Indeed, often, such conferences are attended only by the attorney. DOJ Tax CES does have a policy for not holding any "admissions" the attorney makes in those conferences against
Immunity - Proffer Sessions. In my experience, Immunity discussions most often comes up during grand jury investigations, frequently in the context of interviews by the grand jury team (the prosecutors and IRS agents assisting the grand jury), which are commonly called "proffer sessions." Strategizing how to manage a proffer session request and attendance at a proffer session is an art form for the criminal practitioner. Because little good for the client who is a target or subject of the grand jury comes from such a session, many good practitioners advise their clients not to participate. Still, in discussing whether or not the client will participate and what is in it for the client, the issue of what if anything the prosecutors can do with what the client says inevitable comes up. In our experience, as we note on p. 241 in explaining how the immunity discussions go, the prosecutor will offer use immunity and will state that, in his district, his U.S. Attorney permits only use immunity. This is standard practice in, for example, the Southern District of New York where many high profile financial and tax crimes are prosecuted. (That offer of only use immunity also is accompanied in the so-called "proffer letter" stating the limited scope of prohibited use, along with other draconian terms one-sided in the prosecutors' favor.) As noted, the important witness may be able to negotiate derivative use immunity if he is important enough for the prosecutors, but that is the rare exception and not the rule. (Taking that one step further, the really valuable witness might even obtain some type of complete immunity, but that is even more rare.)
Work Product Privilege. We short-changed the readers of the book on the work-product privilege and will include more in the next edition of the book.

Ch. 8 Pre-Trial Issues in Criminal Tax Cases

Ch. 9 Trial and Post-Trial.

Ch. 10 Sentencing in Tax Cases

Errata. Ex Post Facto (p. 303 of Text). There is a split in the circuits as to whether the ex post facto analysis requires in appropriate cases that an earlier version of the Guidelines be used. I discuss this on my blog here.
In United States v. Clarke, ___ F.3d ___ (11th Cir. 2008), the Eleventh Circuit discusses the circuit split as to whether unclaimed items on the original false return can be used to reduce the tax loss for sentencing purposes. This is the issue in Chavin. involving unclaimed deductions. I discuss this issue on my Tax Crimes blog here. The Clarke court sides with what it describes as the "majority view" of the circuits is to deny such unclaimed benefits.
Guidelines Sentencing Calculator. Someone has mounted a Guidelines Calculator on the web. You might try a simple Guidelines calculation (e.g., a tax dollar loss of $500,000, with acceptance of responsibility and no other adjustments or criminal history). Be sure and enter the actual tax code crime involved. I have only tested it once with tax evasion (Section 7201), and it got the right answer. I have a similar excel spreadsheet that I use for quick and dirty estimates, but always go through the calculation drill when it gets to be critical. If I get some time in my life to work on my excel spreadsheet, I may post it here, but I need first to make sure that it does not contain traps for the unwary and properly signals where the land mines are.
Major 3rd Circuit En Banc Decision Holds that Appellate Review of Sentencing Judge's Discretion to Fashion an Appropriate 18 USC Section 3553(a) Sentence is Quite Limited. The decision in United States v. Tomko, ___ F.3d ___ (3d Cir. 2009) is here and my initial Blog discussion is here. The majority and minority discussions of the scope of the review are quite excellent and adequately present the opposing positions. Some have speculated that DOJ might use this case a certiorari vehicle to get further instruction from the Supreme Court.

Ch. 11 Ehtical Issues in Criminal Tax Practice

Ch. 12 Major Collateral Issues

Ch. 13 Civil Tax Considerations

Collateral Estoppel After Tax Evasion Conviction. In Williams v. Commissioner, T.C. Memo 2009-81, the Tax Court applied this concept in a straightforward manner. Nothing unusual here, except that, in the criminal case, the taxpayer pled guilty to a single count charging tax evasion for 8 years. Normally, 8 years of tax evasion would be charged in 8 counts. (I presume that the statute of limitations would be open, but that was not addressed in the case). By pleading guilty to that single count covering 8 years, the defendant-taxpayer subjected himself to collateral estoppel on the issue of fraud in the later civil case. I discuss the case here.

Ch. 14 Putting It All Together

Student Questions asked after the last class and before 5:00 pm on May 4, along with professor's answers

4/30/2009	A student asked the following question: In chapter 5, page 176, the last sentence of the section on 5th amendment defense. It says that a good-faith 5th amendment claim, even if erroneous, is a valid defense to the element of willfulness. How can this be true when Cheek says that good faith errors concerning constitutional issues are no defense to willfulness? Thanks for clarifying this for me. Professors' collaborative response: This is a good question. The answer lies in the context. The Cheek context is the assertion of some reason that the taxpayer believes he does not owe the tax or is not subject to some tax-related obligation (such as filing). Cheek held that, if the assertion is a legal reason (as opposed to a constitutional reason), the taxpayer can assert that belief as negating willfulness. Cheek willfulness is the intentional violation of a known legal duty. This defense is that, because of his legal analysis, he does or did not know he had a legal duty. The majority in Cheek said, however, that if the taxpayer asserts that the particular tax or other obligation violates the Constitution, the taxpayer necessarily is aware of the legal obligation -- i.e., it is a known legal duty. The taxpayer thus takes the risk of being wrong and suffering the consequences for violating a duty that is known. The majority held that the constitutional claim does not rise to a defense of lack of willfulness. (One can debate, as the dissent does, whether this conceptual division makes sense, but that is the line we now have.) The Fifth Amendment assertion is not a defense of lack of willfulness. Rather, it is a claim that the taxpayer/witness has a constitutional right not to be compelled to give testimony. When the Fifth Amendment claim is first asserted, obviously, it has not been tested. So the courts say that, so long as the taxpayer/witness asserts the Fifth Amendment claim in good faith, the taxpayer/witness is protected at that stage merely by asserting it in good faith, whether or not at a later stage a court determines that the taxpayer/witness did not in fact have a Fifth Amendment privilege. For example, if a drug dealer files a tax return and wants to declare his illegal income without disclosing its source, the taxpayer might declare the amount but claim the Fifth Amendment as to the description of the source of the funds. [Okay, we know this doesn't happen often, but imagine a context in which the dealer has been caught and doesn't want to compound his criminal conduct by filing a false tax return or failing to file a return, but also doesn't want to do anything that would admit his criminal conduct.] Since the taxpayer has a good faith belief that disclosing his drug sales on the return would tend to incriminate him, the Fifth Amendment protects him from the potential crimes of willfully filing a false or knowingly incomplete tax return. So, this is the key distinction: the taxpayer is not claiming that the obligation to report the source of the income is unconstitutional. The taxpayer instead is claiming that the Constitution protects him from complying with this particular obligation, an obligation that is otherwise known, legal and constitutional, because compliance would provide the Government with potentially incriminating testimony by revealing the involvement in the drug dealing crimes. So, Cheek teaches us that a good faith misunderstanding of the law negates willfulness, but not if the failure was based on a claim that the law was unconstitutional. The Fifth Amendment example is not a claim that the law or obligation is unconstitutional. Rather, it is a claim that the Constitution (the Fifth Amendment) protects this particular taxpayer from complying with a known and otherwise constitutional legal duty. We hope this is helpful.
5/4/2009 Q1	Question 1: Does the term “referral” refer only to when the CI agent refers the case to DOJ tax for prosecution? Cf. when the civil agent “refers” the case to CI for investigation – that is a referral in the loose sense of the word, but should not be described by the term of art “referral” correct? Answer to Question 1: You are quite perceptive in noting the ambiguity in the term referral in the context of this course. We are sure that many practitioners use the term “referral” to mean referral to DOJ (“DOJ Referral”). We do that also, but the bare term does have the ambiguity you note – i.e., it could mean the referral from the civil examination function to CI. If you hear the term referral without a qualifier, it probably means the DOJ referral. Still, with the potential for ambiguity, it is better to be specific with the appropriate qualifier.
5/4/2009 Q2	Question 2a: Under the Di Varco test for materiality, what are some examples of things that would not be considered material – i.e. not relevant to the IRS functioning? Question 2b: Is a correct statement to say, “For materiality to be met under §7206(1), the item must actually be material to the return and the defendant must have believed the item to be material to the return.”? Answer to Question 2a: Ultimately, material is something that a juror would think is important in determining criminal liability. For example, any misstatement on a return is potentially a Section 7206(1) crime. But, would the jury convict if the Government’s allegation were that the taxpayer stated Schedule C gross receipts at $99,000 when the true gross receipts was $100,000? There is a legal maxim in other contexts -- “de minimis non curat lex,” which means that the law does not deal with trifles. So, too, the concept of materiality is to permit the jury to ignore trifles. We don’t know that we can be more specific than that – just think whether you, if sitting on the jury, would think that what the taxpayer is alleged to have done is worth a felony conviction. Answer to Question 2b: We think your statement is correct as to the dual requirements for materiality – i.e., the defendant must “believe” there is some falsehood on the return that is material (the statute itself clearly requires that the taxpayer believe the error to be material) and the error must be in fact material. Note that, read literally, the statute would just require that the taxpayer believe it is not true or correct and does not, literally, require it to be not true or correct. Since we don’t convict people for intent crimes (most of the time anyway), the courts require that there in fact be some material falsehood (an objective requirement that is not the same as the taxpayer’s belief that it was material).
5/4/2009 Q3	Question 3: Is a criminal enforcement memo the same thing as a criminal reference letter? The term “criminal enforcement memo” is used in the US Attorney’s Manual: Criminal Tax Case Procedures. Answer to Question 3: We think it is. In the past, before the reorganization of CI, the district counsel attorney was independent of CI and prepared the criminal reference letter after considering, inter alia, the SAR written up by the CI Agent. With the reorganization, the district counsel’s central pipeline role as the referring authority to DOJ Tax disappeared and the attorney moved in-house within the Criminal Investigation division. The agent still writes up an SAR and counsel may advise the agent in that process. The counsel still writes up a legal analysis for DOJ in the criminal enforcement memorandum (per the US Attorney’s Manual reference above). The formal cover letter for the referral (enclosing the SAR and the criminal enforcement memorandum) is signed by the CI Special Agent in Charge (“SAC”) or his delegee. We congratulate this student on going beyond the materials to develop this nuance.
5/4/2009 Q4	Question 4: In an offense conspiracy, the gov’t is required to prove the mens rea for the underlying substantive offense. Does the gov’t have to prove the mens rea for EACH conspirator or just the one on trial? Answer to Question 4: This is a good question. Let’s parse the mens rea concept first. Mens rea in this context can mean two things. First, for substantive tax crimes which require willfulness, it means the intentional violation of a known legal duty. Second, in the context of conspiracy, the required mens rea is that each alleged conspirator intentionally joined the conspiracy having an illegal object (i.e., the illegal object was within the scope of the conspiratorial agreement). If the illegal object is a substantive tax crime that requires willfulness, then each alleged conspirator does have to have willfulness as to the object that requires willfulness. If the illegal object, however, is to impair or impede the lawful functions of the IRS, each alleged conspirator must have intended to join a group agreeing to undertake such impairing and impeding. In conspiracy language, the scope must include impairing or impeding. It is a quite subtle difference and is the battleground in much academic dispute so we will not try to develop it further here. This answer will equip the class members for the exam we will give. Now, as to the second part of your question, we must develop the concept a bit. The Government must prove that the defendant in the dock joined a conspiracy that had within its scope either or both an agreement to commit an offense or an agreement to impair or impede the IRS. Once there is such an agreement and some overt act in furtherance of the agreement occurs, then each member of the conspiracy can be prosecuted and convicted. Now, in order for there to be a conspiracy, at least one person other than the lone defendant in the dock must have joined the conspiracy. So the Government has to prove the required mens rea for each person it claims to be a member of the conspiracy, but in order to convict, it must actually prove it only as to the defendant in the dock and at least one other person.

Web Sites of Interest

Department of Justice
Criminal Tax Manual - HTML & PDF.
Tax Division Home Page

Internal Revenue Service
    Criminal Investigation Division:
        CI Home Page
    Internal Revenue Manual
        Ch. 9 - Criminal Investigation

United States Sentencing Commission

Additional Resources (Optional)

United States Attorneys Bulletin Devoted to Tax Prosecutions (1998). Somewhat dated now, but still contains the basic of DOJ's view of the tax system and the interface between DOJ Tax and the local United States Attorneys' Offices.

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