Review of DOJ Criminal Tax Manual (Part One)
Much like corporations, federal agencies operate under guidance delivered from the top of the institution. Federal criminal tax investigations follow a well-structured procedure promulgated by the Department of Justice (DOJ). DOJ standards are laid out in the Criminal Tax Manual. This manual is available online here.
The DOJ tax manual provides powerful insights into the policies and considerations the government uses to prosecute these cases. These insights should be understood by criminal tax attorneys who represent clients in this field. Even experienced criminal tax attorneys can improve their understanding of these cases, and potential leverage points, by reviewing the manual and understanding its concepts.
This post will review key points of the DOJ tax manual, outlining the key sections that should guide criminal tax practice. The goal is to provide valuable information to taxpayers under criminal investigation and practitioners who aim to represent these clients. The Criminal Tax Manual is a large document with a variety of insightful sections. The analysis of the manual will be done in multiple posts under the “Criminal Tax Manual” heading. Once authored, each post will be referenced at the bottom of other posts in the series for easy navigation.
Organization of the Criminal Tax Manual
The DOJ criminal tax manual covers a wide array of topics. These topics include the organization of the criminal tax enforcement apparatus, criminal tax procedures, policy directives, statute of limitations information, individual sections for the main criminal tax offenses, methods to proving tax loss, sentencing instructions, and jury instructions for each criminal tax offense. This post will walk through these structures and highlight the information that criminal tax attorneys need to understand to competently represent taxpayers under criminal investigation or criminal indictment.
Criminal Tax Enforcement – The Nuts and Bolts of the Organization
The stated goal of criminal tax enforcement is to protect the integrity of the tax system by working with local prosecutors, agents, and criminal tax attorneys to ensure taxpayers that defraud the system are punished in accordance with Title 26. DOJ overtly states they have insufficient resources to locate and prosecute every tax violation. Based on this reality, DOJ views tax prosecutions as serving two main goals: 1) punishing the violator and 2) detering other taxpayers from committing violations.
Structure of Federal Criminal Tax Enforcement
Criminal tax laws are enforced by three main entities: 1) Internal Revenue Service (Criminal Investigations Division (CID), 2) DOJ Tax division, and 3) local United States Attorneys’ Offices. These three entities are broken down as follows:
DOJ Tax is broken down into a criminal appeals section and criminal enforcement sections. The criminal enforcement sections are broken down further into regional offices (Southern, Western, and Northern). The criminal enforcement prosecutors report to their division chiefs. The division chiefs report to the Assistant Attorney General of the Criminal Tax Division.
The main role of the criminal enforcement section is to review evidence in criminal tax investigations and make decisions on charging. The prosecutor assigned to a particular case will have the ultimate authority (with his chain of command) on all major decisions. If a taxpayer is charged criminally, the DOJ prosecutor may hand off the case to the local Assistant United States Attorney or actively participate in the trial.
The structure of this enforcement apparatus must be well understood by criminal tax attorneys. The only way to gain leverage in a criminal tax case is via DOJ Tax. While laying out issues to a local prosecutor can give an advantage; ultimately, nothing can get done without the approval of the DOJ tax prosecutor assigned to the case. This is why it is imperative that the attorney requests a conference with DOJ Tax in every case. If a good result can be obtained for the client before formal charges, it will happen via communications with DOJ Tax.
Criminal Tax Charging Decisions
To meet that mission statement, the DOJ is advised they should charge a defendant with the “highest provable offense.” This means that DOJ should be reluctant to charge bargain with a defendant unless they are concerned with their ability to prove a felony offense. This notation is important for criminal tax counsel. Attorneys that operate in state courts become used to the concept of charge bargaining. In state courts, it is common for a local DA to allow a defendant charged with a felony to plead to a misdemeanor offense to resolve the case.
In the criminal tax world, DOJ is reluctant to charge bargain with a criminal tax defendant unless a valid defensive theory is presented. Put differently, if DOJ believes they can make the felony case, they will try to avoid misdemeanor plea offers at all costs. This does not mean DOJ never pleads felony recommendations to a misdemeanor offense, but it does provide insight into how a criminal tax attorney needs to handle early negotiations if a misdemeanor is the goal. It is imperative that a defensive theory with weight is presented to DOJ for any chance of charge bargaining. While DOJ will consider mitigation in these discussions (taxpayer background, reason for not paying, collateral consequences of a felony plea), mitigation alone is often insufficient to charge bargain with DOJ.
DOJ Oversight in Criminal Tax and Companion Cases
DOJ Tax is located in D.C. They have satellite offices around the country. Unlike many federal offenses, DOJ has direct oversight in every criminal tax prosecution in the United States. The local United States Attorneys handling these cases do not make decisions in a vacuum. Every strategic or material decision requires input from DOJ. DOJ will assign one of their prosecutors to every case. Depending on the jurisdiction, and their ability to handle the case solo, DOJ will serve as either a sounding board in decision-making or they may directly handle the case through trial.
DOJ Tax’s stated jurisdiction is for Title 26 criminal tax offenses. However, they can also spearhead prosecutions for other white-collar offenses that run parallel with the tax crime. These offenses include mail fraud, wire fraud, embezzlement, RICO, obstructions, and Klein conspiracies. An example may help in highlighting this point – let’s assume a taxpayer commits tax evasion by moving money into a bank account that is not known to his accountant or the government. If he files a false return omitting income in that account, he could be charged with tax evasion of assessment (a breakdown of the different types of tax evasion can be found here). If a portion of that money was sourced from misappropriated funds from a client, the taxpayer could also be charged with embezzlement or wire fraud. If indicted, the taxpayer should expect multiple counts of tax evasion and another white-collar criminal offense (likely wire fraud). DOJ would have jurisdiction over that entire case even though specific counts are not Title 26 violations.
DOJ’s role in criminal tax offenses is outlined statutorily. This means that the rules regarding DOJ oversight are mandatory. One caveat to DOJ oversight involves investigations by CID (“administrative investigations”). Prior to the involvement of a grand jury, CID can investigate criminal tax offenses (using their summons power) with no DOJ oversight. When their investigation is complete, they will need to bring in DOJ to decide whether they should: 1) begin additional investigation with a grand jury, 2) approve charges, or 3) deny charges.
This caveat is important because many criminal tax investigations start with CID summonses. At that stage, it is likely that the special agent with CID and a local prosecutor are the only enforcement entities involved in the investigation. When the case goes to DOJ following the completion of the investigation, the taxpayer will receive a letter from DOJ. That letter will invite the taxpayer to schedule a conference to discuss the case. This is an important window that all criminal tax defendants should explore. It is the only time the defense attorney can sit down with DOJ prosecutors and plead their case. Once the charging decision is made, it becomes more difficult to stop the train.Over half of the criminal tax cases we have resolved civilly with no criminal charges or with a misdemeanor plea utilized the DOJ conference. We cannot stress enough how important the DOJ conference is to assist these clients. While a DOJ conference does not ensure a good result pre-indictment, it is a necessity to achieving one in most cases.
An additional caveat that we see in practice involves the expansion of non-tax grand jury investigations under the Title 26 umbrella. In such circumstances, the local United States Attorney’s Office may investigate a Title 26 offense with no DOJ oversight. For instance, let’s assume that a local prosecutor is investigating a target for defrauding his clients using a Ponzi scheme (think Bernie Madoff). During that investigation, evidence is uncovered that the target filed false tax returns following the criminal fraud. In that situation, the local prosecutor would be allowed to investigate and charge the Title 26 offenses without DOJ oversight.
Exercise of Prosecutorial Discretion
While the main marching order for DOJ is to prosecute the highest provable offense to meet the goals of enforcement, the manual does include other factors that DOJ should lean into when making charging decisions. Those other factors include: 1) no substantial federal interest would be served by prosecution or 2) there exists adequate non-criminal sanctions. These two factors are important because they can be used to bolster the defensive theories outlined in the prior section. Though the manual does not discuss a threshold tax loss, we have noticed that DOJ is reluctant to expend finite resources to prosecute cases with a low tax loss. DOJ is not in the business of loading their criminal enforcement prosecutors down with 1,000 low level cases. They aim to use their limited resources to serve the biggest slice of U.S. financial interest possible. In that vein, it makes sense that DOJ would rather handle 100 multi-million dollar fraud cases over 10,000 low level tax crimes. The former strategy allows for a larger recovery to the United States Treasury and a bigger deterrent effect. After all, most would-be criminals are deterred by multi-year prison sentences instead of thousands of probations (a more thorough review of the role of tax loss at sentencing can be found here).
The second factor (adequate non-criminal sanctions) is a consideration that we have used with some success. If the government is a little hesitant about their ability to prove their case, a criminal tax attorney can leverage the draconian penalties and interest consequences to offer an adequate non-criminal result. If a taxpayer can pay off the tax loss (including penalties and interest), this may allow the DOJ prosecutor to bend on charging decisions. While DOJ frowns on taxpayers paying their way out of criminal charges, payments of taxes can combine with valid defenses to increase leverage.
One area where we have seen positive feedback from DOJ involves getting a person in compliance with the tax laws. If the criminal tax attorney can assist his/her client with getting their taxes in order after years of non-compliance, DOJ will consider that fact in charging decisions.
Another side note involves the charging decisions at DOJ. In our experience, DOJ avoids pleas to failure to pay tax in an investigation for tax evasion. The taxpayer’s failure to pay is central to the evasion offense, and thus, DOJ frowns on that plea offer. If a criminal tax attorney plans to offer a misdemeanor resolution, they should lean into failure to file. We have seen DOJ consider those pleas on the right case. They almost never consider a failure to pay tax offer.