DOJ Criminal Tax Manual Review (Part IV)
This is the fourth post in a series that analyzes the rules and procedures outlined in the Department of Justice’s (DOJ) Tax Manual. In the first post, we reviewed the organizational structure of DOJ’s Tax Division and the role DOJ plays in prosecutions. In the second post, we reviewed the manual’s guidance on administrative and grand jury routes to indictment. In the third post, we reviewed use immunity, when to the take the Fifth Amendment, and the structure of the enforcement division of DOJ Tax in D.C.
In this post, we continue our journey through the manual highlighting practice tips along the way. The focus of this post will relate to DOJ policies behind plea agreements and their terms.
Plea Agreements in Criminal Tax Cases
If a criminal tax attorney is unable to derail the criminal investigation, DOJ will choose to move forward with formal charges. The exact process for formal charging depends on the posture of the defendant. If the taxpayer chooses to fight DOJ, the prosecutors will file a formal indictment charging the taxpayer with appropriate criminal tax violations. If the taxpayer chooses to lay down their sword, the taxpayer’s lawyer and DOJ can work out a deal which allows the taxpayer to plead to a criminal information.
If a taxpayer chooses to plead guilty, they will enter into a plea agreement with the government. A plea agreement serves the interest of both the taxpayer and the government. The taxpayer benefits through controlling key sentencing factors. The government benefits through an agreement to restitution and proper admonishments. For the taxpayer, the key factors that can be controlled in the plea agreement include the amount of tax loss, amount of restitution, applicability of certain sentencing enhancements, and the factual basis that supports the plea. Each area must be considered when crafting a plea agreement to ensure the taxpayer’s interests are protected.
Around 90% of defendants charged in the federal system plead guilty to a criminal offense. This reality makes plea agreement practice an important consideration for attorneys on both sides of any criminal litigation. To guide prosecutors, DOJ Tax lays out their mandates for plea agreement in the DOJ Tax Manual. The manual lays out guidance in the following areas: major count policy, relevant conduct and tax loss, waivers of appeal, Alford pleas, probation agreements, statements at sentencing, and civil settlements in lieu of criminal enforcement. Each of these areas must be understood when representing clients in a criminal tax matter. These issues arise consistently in these cases.
Major Count Policy
During the authorization phase, DOJ Tax flags one count as the “major count.” This is typically going to include the highest count they believe can be proven beyond a reasonable doubt. Pursuant to DOJ policy, local counsel or the DOJ trial attorney can move forward with a plea under the major count without approval from DOJ. However, any plea deal that includes a plea to something outside the major count must be independently reviewed and authorized by DOJ.
DOJ states the major count policy is intended to “promote deterrence, ensure the defendant will be held accountable at sentencing, and eliminate the defendant’s ability to contest the criminal conduct in a civil tax proceeding.” Put differently, the major count policy ensures the government will recoup the largest restitution possible while serving the goal of deterrence that is central to white collar prosecutions.
DOJ’s major count policy is principled on the following:
- Felony counts take priority over misdemeanor counts;
- Tax evasion is preferable to other substantive tax counts;
- The count with the longest prison sentence is the major count;
- If the counts violate the same statute, the count with the largest loss prevails; and,
- If the counts violate the same statute, and the loss is comparable, the major count will be the one that contains the most severe conduct.
These underlying principles are important to understand. Often, defense attorneys will engage in plea negotiations with the local Assistant United States Attorney. This can occur during a grand jury investigation or following authorization from DOJ. It is important to understand the limitations placed on the local prosecutor when considering strategic paths to employ.
An example will likely highlight this issue best. A tax evasion of payment case (felony) will involve the failure to pay tax (misdemeanor). The difference between the offenses lies in the affirmative act to conceal element in tax evasion. When representing a client being investigated for tax evasion, it makes logical sense to negotiate a plea to the lesser included offense of failure to pay. This would result in a misdemeanor plea for the client, and potentially, open a path to argue for probation at sentencing.
In our practice, we have learned that DOJ frowns upon any pleas to failure to pay in a felony investigation (tax evasion or filing a false return). They are much more likely to allow a plea to failure to file under these circumstances. While this stance seems illogical at first blush, it makes perfect sense once the mandates of the manual are understood.
Tax evasion is the penultimate major count in DOJ’s eyes. A plea to failure to pay acknowledges the strength of DOJ’s tax evasion case but asks them to revert to the misdemeanor on other grounds. This makes little sense considering the following directives: 1) felonies are better than misdemeanors, 2) prosecutors should charge the highest provable offense, 3) pleas should include the major count, and 4) the goal of criminal tax prosecutions is deterrence. While failure to file does cut against these considerations, it does so without including offense characteristics embedded in tax evasion.
Once this rule is understood, the defense attorney can craft his negotiations within these limitations. After all, it is important to ask for concessions that are available under the rules. This reality is exactly why criminal tax lawyers must review the DOJ tax manual and combine these results with their experience in practice. There are numerous tricks to the trade that make perfect sense once the rules are understood. Federal prosecutors are not illogical. However, they have their mandates from the top and will often take the path of least resistance.
Relevant Conduct and Tax Loss in Criminal Tax Plea Agreements
As discussed in another post, the tax loss associated with an offense is the key to criminal tax sentencing. It drives the recommended guideline range for punishment and will form the foundation for restitution order.
Given its centrality, DOJ addresses how prosecutors should handle the tax loss in plea agreements. As a general rule, DOJ wants a defendant held accountable for as much loss as possible. This means that the starting point for tax loss calculations is the tax loss under the count of conviction plus any tax loss that can be justified as relevant conduct. DOJ pushes prosecutors to not negotiate the tax loss with defense attorneys as a bargaining chip, but rather, only consider credible arguments for tax loss reductions. To ensure this mandate is followed, DOJ must review a tax loss reduction before it is cemented in the plea agreement.
This mandate is important. A defense attorney should not use the tax loss as a bargaining chip in negotiations. The prosecutor cannot lower the tax loss tied to the relevant conduct as an inducement for the plea. Even if the prosecutor wanted to lower the loss, they cannot without prior approval from DOJ Tax. Like most areas in this field, an attorney can only obtain concessions with valid, fact-based arguments for a lower tax loss. This must be done through creative accounting practices and/or arguments to remove relevant conduct pursuant to the sentencing guidelines. Unless a legitimate, well-crafted argument is put forward, the government will not lower the tax loss as a concession for the plea.
In our practice, we normally get reductions in the tax loss within the plea agreement. Most times, the IRS’ determination of the loss is inflated because they have limited information to work with. While an IRS agent has access to bank records and financial documents, they do not have access to the taxpayer. This means they are almost guaranteed to make mistakes when they flag items as income or personal expenditures.
For example, our firm represented a taxpayer who failed to declare specific checks on his yearly returns. The CID Agent added up the checks and included them as income in the year they were received. This resulted in a tax loss of over $1 million. The IRS did not know that the taxpayer used the cash from those checks to buy goods for his restaurant business. Those goods were legitimate business deductions that were also left off the return. We were able to find records supporting the business deductions. This offset the unreported income figure substantially. The final tax loss was $110,000. This was an important finding as it lowered the taxpayer’s recommended guideline range, and he ultimately received probation at sentencing.
This example highlights the importance of challenging the tax loss with credible evidence. Without this challenge, this client would have likely spent multiple years in prison based on a loss that was not valid. It is imperative that attorneys do a deep dive into the numbers to ensure the tax loss is accurate. It is too important to the criminal process to leave the stone unturned.
Most plea agreements are going to involve a plea to one count. For instance, if a taxpayer filed false returns for tax years 2010-2020. The taxpayer would likely plead guilty to filing a false return for the tax year with the highest loss. However, that plea does not limit the tax loss that underlies the scheme. For this defendant, the tax loss will likely include the loss associated with every year during this time span pursuant to the sentencing guidelines’ relevant conduct provisions (a more in-depth review of relevant conduct can be found here). This concept is well understood and usually pretty straight forward.
However, issues can arise when the government hopes to include tax loss from a separate criminal violation or course of conduct. For example, let us assume a taxpayer evades payment of his taxes from 2010-2014. Then in 2015, he files a false return with the IRS. This taxpayer pleads guilty to filing a false return (2015 tax year). Under this situation, the government is going to try and include the evasion of payment loss in the tax loss underlying the plea. But this time, it is not as straight forward as the conduct from 2010-2014 is notably different than the count of conviction and the taxpayer has not admitted to that violation. The taxpayer has a valid argument that this tax loss should not be included.
The government will know that this argument is coming and attempt to shore up this issue within the plea agreement. This can be done a few ways: 1) include facts supporting tax evasion within the plea agreement (resulting in a judicial confession to that offense), 2) obtain a stipulation in the plea agreement that the other offense was committed, or 3) require the defendant pleads to two total counts covering the entire scope of conduct. In most cases, the government will avoid this conversation altogether by slipping the evasion facts into the plea agreement. If the criminal tax attorney does not notice it, and advises the client to sign, the damage is done. If the attorney makes the loss an issue, the government will work to find a middle ground if practicable. During that negotiation, the defense should remember that the local prosecutor will only reduce the tax loss if credible arguments are made. In this case, if the defense attorney can convince the government the tax evasion was not committed or the separation between the schemes is too great, a reduction may be obtained.
Alford Pleas in Criminal Tax
In the federal system, a defendant may plead guilty to a criminal offense without acknowledging his guilt. North Carolina v. Alford, 400 U.S. 25 (1970). These pleas are seen as business decisions where the defendant is acknowledging he may lose at trial while still professing his innocence. This differs from most state systems where a defendant may only plead guilty when they are in fact guilty of the offense.
Under the DOJ Tax manual, prosecutors must object to any Alford plea in a criminal tax case. Additionally, if a defendant undertakes an Alford plea to fewer than all of the charges pending, the prosecutor is advised to continue with prosecution on the remaining counts. They may only dismiss the remaining charges with approval from the Assistant Attorney General of the Tax Division.
This stance by DOJ makes sense as it removes the defendant’s ability to craft the count of conviction. For example, let us assume a defendant is charged with tax evasion and failure to file a return in a two-count indictment. The defendant could set the case for rearraignment and make an Alford plea to the misdemeanor count. The Court is obligated to accept the plea. After that plea, the government has a choice to make – dismiss the evasion count or move forward to trial on that felony. The DOJ manual is clear that prosecutors must move forward with the evasion count under such a scenario.
Government Statements at Sentencing and Agreements to Probation
At sentencing, the government attorney is required to make a full recitation of the facts underlying the scheme. This recitation should include the tax loss associated with the crime, the means used to perpetuate the scheme, the criminal record of the taxpayer, and other aggravating factors.
While DOJ does not require the prosecutor to request prison time, the manual does prevent prosecutors from agreeing to probation in most cases. DOJ will only approve an agreement to probation if: 1) the guideline range is 0-6 months, 2) the defendant pleads guilty, and 3) the appointed United States Attorney signs and approves the request. These factors ensure the government will agree to probation in nearly zero criminal tax cases. The chances of getting that guideline range and United States Attorney approval are slim.
This stance, however, does not mean that the government must oppose probation. In practice, many prosecutors do not try and hang criminal tax clients under the guidelines. The reality is most of them view probation as appropriate in the right case. Under those circumstances, the prosecutor will normally “defer to the Court” at sentencing; sending a signal to the Judge they do not oppose probation but cannot say so in open court.
We have obtained probation for multiple criminal tax clients over the last thirty years. Each time, sentencing took the same route. The client pleaded guilty to the offense, the tax loss was manageable, the client paid back restitution before sentencing, and the government took no position at the sentencing hearing.
Using the Civil Process to Compromise in a Criminal Investigation
The overarching rule within DOJ Tax is that a defendant cannot pay their way out of a criminal investigation. Though the Attorney General may consider payment in compromise of criminal charges, this is never used for the average litigant. If the government believes there is a reasonable probability of conviction, DOJ will move forward in nearly every case.
Attorneys that do not practice in the criminal tax arena often mislead their clients under this logic. We have had multiple lawyers advise clients, prior to us, they could pay back taxes and forego prosecution. As a general rule, this tactic only serves to assist the client at sentencing. The authorization decision will not be reverted based on payment of the liability.
Having said that, there is some juice a taxpayer can create by paying back the liability prior to DOJ authorizing charges. If the case is in the initial stages of the investigation, a full payment of liability can reverberate through the authorization process. It is by no means a guarantee the client will forego charges, but the chance is not zero. It can be one of many factors considered by DOJ in determining whether to move forward.
Under a plea agreement, DOJ will not include a global resolution to civil and criminal liabilities. In every agreement, the government will include a paragraph advising the taxpayer that the criminal agreement does not impact the civil IRS’ ability to recover back taxes, including penalties and interest. The reality is that most criminal tax defendants will have a lengthy bout with the civil division of the IRS once the criminal case is done. The criminal process aims to recover the back tax liability underlying the scheme. It is almost completely devoid (except in tax evasion cases) of penalties and interest. Once the criminal case is over, the civil division will often swoop in to exercise their rights to additional funds beyond the underlying liability.
To assist the civil division with their recovery, the government will often put certain stipulations or admissions within the plea agreement. The DOJ Tax manual includes the following recommendations for inclusion:
- A stipulation to the civil fraud penalty for understating income (this penalty is up to 50% of the taxable income);
- Agreements to file amended, accurate returns;
- Agreements to not file claims for refunds, penalties or interest; and,
- Agreements to close out the civil settlement before sentencing.
While DOJ seems to push prosecutors to include the above language, in practice, we do not see these detailed admissions often. Normally, the plea agreement will simply require the defendant to acknowledge the criminal process does not impact the rights of the civil division.
Conclusion
Plea agreements are important parts of the criminal tax system. Before advising a client on any plea agreement, it is imperative criminal tax attorneys understand the rules and procedures in this area. The difference between a probationary sentence and prison can often lie in the strategy used leading into the agreement, and the tax loss underlying it. The limitations placed on prosecutors should guide the defense attorney in developing a strategy to ensure the client receives the best resolution possible.
In the next post, we will continue our review of the DOJ Tax manual with a focus on detention pending trial and the statute of limitations.