Saturday, March 28, 2009

Tax Due - Tax Loss; Critical Differences For Sentencing (3/28/09)

Tax Due - Tax Loss; Critical Differences For Sentencing

I have previously discussed here and here the element of tax due and owing for tax evasion under Section 7201. Since tax due is an element of the crime, the defendant may assert items not previously claimed that would eliminate tax due, thus defeating this element of the crime. Generally, a defendant will assert unclaimed deductions to eliminate the tax due and owing, but the defendant may assert other tax attributes such as a favorable filing status. (There is the further, more subtle issue, which we discussed in another context here, as to whether the Government must disprove that the defendant had the unclaimed tax attributes in order to meet this element of the crime; but let's forego that for purposes of the present discussion.)

The Sentencing Guidelines have a related but different concept called tax loss that is a principal driver in calculating the sentence. Tax is a financial crime and, as with other financial crimes, the monetary quantum is the principal driver in the sentencing calculation. The tax loss is "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). Can the defendant assert items not previously claimed in order to reduce or eliminate the tax loss, thereby reducing his or her sentence?

The Eleventh Circuit recently addressed this issue in United States v. Clarke, ___ F.3d ___ (11th Cir. 2008). The defendant was charged with tax perjury under § 7206(1). (The court itself misspoke in calling the charge tax fraud.) He had filed his original return as married filing separately. The Government asserted that the defendant must be sentenced based on a calculation under that status. The defendant asserted that the tax loss should be calculated on the basis of married filing jointly, as if he had filed an amended joint return, which would reduce the tax loss sufficiently to fall into a lower Guidelines offense level. The judge sentenced on the basis of the tax loss calculated under the married filing separately status. The defendant appealed that issue, among others. The Court of Appeals held that the tax loss was not the actual tax loss to the Government but the tax loss the defendant intended when he filed his return. Since he filed using the status married filing separately, he intended that his omissions in reporting would generate a tax loss based on the status he used in reporting. In so holding, the Court noted that there was a split among the courts as to whether the tax loss could be reduced or eliminated by unclaimed items -- in this case an unclaimed status, but more often unclaimed deductions. In so holding, the Court of Appeals said it was joining the "majority of the circuits."

Does it seem right that a defendant could be convicted of tax evasion on the basis of a tax evaded 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 Government’s 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 based on $100,000 tax loss without giving the defendant the benefit of the $80,000 proved unclaimed deductions. Under the line of authority cited in Clarke, the Government may do that. Does that sound right to you?

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 items. 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 items, 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 items don’t 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 items.


  1. I don't think it is fair to use $100,000 for sentencing when testimony at trial showed the loss to be $20,000 had all of the deductions been taken. I am reading your book and thought I understood this issue until I read a recent Tax Court case (Anderson TC Memo 2009-44)In that case Amderson was charged with evasion for 1995-1999. The government dropped the early charges and he plead guilty for 1998 and 1999. The government dismissed the 1995-1997 charges. The tax losses for all 5 years were enormous (Almost $200 million) When he is sentenced, is he senteneced for only the tax losses in the years he plead guilty or do they have a way of adding the losses for the years that were dismissed?

    If I were the lawyer drafting a plea agreement, I would argue that the government will get its money back with the 75% fraud civil penalty and ask not to include the tax losses from the dismissed years.


  2. P.S. - enjoying both your book and the blog.


  3. Reply to Anonymous comment of 3/28/2009 2:03 pm.

    The Guidelines, as interpreted, permit the sentencing calculations to include noncharged, dismissed and even acquitted counts / years. This is permitted through the concept of relevant conduct which the framers of the initial Guidelines were quite enamored with. The notion is that conduct outside the conduct for which the defendant is convicted can be considered in the way judges did even before the Guidelines were created (indeed there were few formal boundaries then as to what the judge could consider). Some limitation on the consideration of such non-convicted conduct is created by the Guidelines in the sense that the sentencing judge should find the existence of the non-convicted conduct by a preponderance of the evidence. Indeed, this burden of proof nuance is why the sentencing judge is permitted to consider acquitted conduct. All the acquittal says is that the Government did not prove its case beyond a reasonable doubt and therefore the acquittal. The Government could have proved the conduct by a preponderance of the evidence but that is not enough to convict. This consideration of "relevant conduct" has been controversial as to acquitted conduct, but has been approved by the Supreme Court.

    This burden of proof nuance plays out in other ways. For example, if the acquittal is for a charge of tax evasion, the Government can still in the civil tax case claim the civil fraud penalty (75%) because the burden of proof is lower (in the case of civil fraud, clear and convincing evidence rather than beyond a reasonable doubt).

    As to your final comment about drafting the plea agreement, the concept of tax loss does not permit the judge to consider that the taxpayer will actually pay the tax, penalty and interest so that the Government in fact has no loss. It is the loss intended -- actually the base tax liability -- by the underlying criminal conduct that goes into the calculation. In this regard, I think it also important to emphasize that, under post-Booker sentencing, the Guidelines are advisory only. So, the judge may and, I suspect, often does consider and give some credit to payment in determining the sentence. Thus, and this is a nuance that I'll perhaps address later in a blog, by paying the tax, penalties and interest before sentencing, the defendant may be given some extra consideration for acceptance of responsibility, sometimes called super acceptance of responsibility. In this regard, the Government policy now is to require the taxpayer to agree to the liability and, if possibile, make the payment by virtue of contractual restitution included in the plea agreement itself, even though, absent the contractual agreement to restitution, the court could not impose the restitution. Of course, by contractually agreeing to the restitution, the taxpayer is in effect foreclosing his ability to argue as to the relevant nonconvicted conduct that he did not commit civil fraud so as to avoid ultimate liability for the underlying taxes, penalties and interest.

    I hope this is helpful.

    Thanks for your comments.

    Jack Townsend

  4. In this regard, the Government policy now is to require the taxpayer to agree to the liability and, if possibile, make the payment by virtue of contractual restitution included in the plea agreement itself, even though, absent the contractual agreement to restitution, the court could not impose the restitution.

    Hi Jack,

    In reading your book, I noticed a cite to an Arizona State Law Journal article by Bucy entitled Criminal Tax Fraud - The Downfall of Thieves, Murderers and Madams. On page 700 of that article, she discusses that restitution can be ordered - 6th circuit. Now I'm a tax lawyer with no experience in the criminal tax area (trying to learn from your book and treatises) so I'm just trying to piece things together here. It would seem that restitution in a criminal tax case is not needed because the IRS has civil means to collect the tax via lien and levy. And if the defendant is indigent then criminal restitution is as useless as civil lien and levy. Unless there is something I am overlooking such as a criminal restitution order cannot be discharged in bankruptcy while a civil order can or something like that.

    Looking forward to more posts.

  5. To Anonymous:

    Restitution in tax cases is not allowed by the statute because there is an adequate system for the IRS to collect the tax, penalties and interest. A sentencing judge can still order restitution in tax cases as a condition of some benefit the judge is conferring in the sentencing. However, the current DOJ policy to require contractual restitution covers the field for plea cases (which are over 90% of the cases).

    One question readers may have is why DOJ has the policy to require restitution as a condition of agreeing to a plea. I think that policy is an attempt to collect the amount incorporated in the restitution agreement without the risks involved in the ensuing civil case. If there were no contractual restitution, the minimum quantum of the tax liability would not be determined in the criminal case and would be open for further dispute in the civil case. The defendant's liability for the civil fraud penalty and an open statute of limitations would not be determined in the criminal case except, by operation of collateral estoppel, in a tax evasion case for the year of conviction. By incorporating the tax liability, penalty and interest in contractual restitution, the Government insures that the taxpayer will be liable for that minimum amount and eliminates the risk in the ensuing civil case that the IRS would be unable to prove fraud by clear and convincing evidence (an inability that would foreclose the civil fraud penalty and even the tax and interest for otherwise barred years).

    Finally, as to the bankruptcy issue, civil taxes and some penalties cannot be discharged in bankruptcy if fraud is involved. Incorporating the taxes, penalties and interest in contractual restitution just foregoes a later fight about that, in much the same manner as discussed above.

    Hope this helps more than it confuses.


  6. Mr. Townsend,What is your opinion of a case where the government audits the taxpayer but makes no assessment of any additional taxes, no penalties, and no interest, but charges the taxpayer's advisor with aiding and abetting tax evasion, and claims that there is a tax deficiency based on the amount that should have been included on the tax return? Is there really a tax deficiency or a tax loss if they don't even assess the tax?

  7. The sentencing judge would not necessarily be precluded from finding a tax due and owing even though the IRS appears to have done a "no change" for the underlying taxpayer. However, it may be that that evidence might not get in, although I would urge that the prosecutors must disclose the evidence (or at least the bottom-line no change) in the sentencing process.

    Now, if the no change were the result of a litigated proceeding (even a settled litigating proceeding where, as in the Tax Court, the basic judgment (there called the decision) is entered and will reflect the no change), the Government would be collaterally estopped to assert that there is a tax due. Collateral estoppel may not technically fit (because there is no privity between the defendant in the criminal case and the taxpayer in the litigated civil suit), but I think the judge would exercise his or her discretion to treat that amount as zero for purposes of the criminal tax loss calculation. At least that would be my argument, and I would invoke the echoes of the reasons for collateral estoppel and the fact that inconsistent judicial results would have a tendency to discredit the judiciary as well as the whole process.


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