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: 02/22/11

Text Supplement is downloadable here.

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). Where I mark the item OPTIONAL, it is not assigned reading.

Ch. 1 Overview of the Criminal Tax System.

Webster Commission Report in Adobe Acrobat Format. (OPTIONAL)
Government Appellate Brief in Snipes click here. (OPTIONAL)
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)

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.
The Ninth Circuit decided Boulware on remand from the Supreme Court. See the blog discussion here. The issue with of concern is 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 Professor Townsend's 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

Title 18 Code Provisions Related to Tax Crimes.
Errata. Note to Class, this is important. On p. 117, the elements of Section 1957's transaction money laundering are misstated in the text but are correct in the Supplement.

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). OPTIONAL
Indirect methods of estimating income and tax. For a discussion of the indirect methods in a civil case where both the Government and the taxpayer submitted different indirect methods, see Kikalos v. United States, 408 F.3d 900 (7th Cir. 2005) (download here) and my article, creatively named Judge Posner's Opinion in Kikalos, Tax Notes (8/1/05) (download here) - OPTIONAL

Ch. 5 Prosecution Policies and Affirmative Defenses

Ch. 6 Sentencing in Tax Cases

The Code was amended in 2010 to permit the IRS to immediately assess tax restitution ordered by the sentencing judge, at least for Title 26 (Internal Revenue Code) crimes of conviction. The Code sections added to accomplish this are 6201(a)(4) and 6213(b)(5). I discuss these provisions and provide a link to the legislation in my Federal Tax Crimes Blog entry "New Statute for Civil Effect of Restitution in Tax Cases (at Least Title 26 Crimes of Conviction)." (Be sure when looking up these Code additions to refer to recent compilations, otherwise they will be missing; for easy review of the particular subsections involved, you can link to the legislation itself here.

Ch. 7 Government Information Gathering

Ch. 8 Pre-Trial Issues in Criminal Tax Cases

For a good discussion of Brady disclosures where the prosecutors have an open file policy in a massive document case, see Jed Rakoff's decision in United States v. Ohle, ___ F. Supp. 2d ___, 2011 U.S. Dist. LEXIS 12581 (SD NY 2011). I excerpt the key parts of that decision in my blog titled "The Mass Document Dump and the Prosecutors' Brady Obligations (SD NY 2011)."

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.

Ch. 11 Ethical Issues in Criminal Tax Practice

Ch. 12 Major Collateral Issues

Ch. 13 Civil Tax Considerations

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
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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