Friday, June 5, 2009

DOJ Tax Division Criminal Tax Investigation Authority

In the KPMG-related criminal case in the Southern District of New York, two issues arose regarding the scope of the authority of the Department of Justice Tax Division ("DOJ Tax") with respect to criminal tax matters. The issues were:

1. Does DOJ Tax have authority to conduct a criminal tax investigation independent of a grand jury investigation?

2. Does DOJ Tax have authority to prosecute or authorize prosecution of a federal tax crime if the IRS does not agree with the prosecution?

Each of these questions have a context that I shall discuss. Suffice it to say at this point that I made a FOIA request to DOJ Tax (here) to try to obtain answers to these questions. The DOJ Tax FOIA response (here) is quite cryptic and simply refers to the provisions of 28 CFR Section 0.70 (online version here). (Actually, the copy of the CFR provision enclosed with DOJ Tax's response is an earlier version than the current one I link to, but I don't think there were any changes in the later version, other than that redesignating the provision as subpart M rather than subpart N in the earlier version provided by DOJ Tax.) The DOJ Tax response also refers generally to the IRS Internal Revenue Manual ("IRM") (access here) without specific citation; I have been unable to discern how the IRM could possibly establish DOJ Tax authority in the subject areas, since the IRM deals with internal IRS procedures.

In this blog, I will address the first question -- DOJ Tax have authority to conduct criminal tax investigations independent of grand jury investigation. The CFR provision to which DOJ Tax provides in part here pertinent:

The following functions are assigned to and shall be conducted, handled, or
supervised by, the Assistant Attorney General, Tax Division

* * * *

(b) Criminal proceedings arising under the internal revenue laws [with exceptions not here material].
The key word is "proceedings." Does the word "proceedings" encompass criminal tax investigations independent of a grand jury? I do note that it is clear that the delegation of authority does include DOJ Tax attorney participation in grand jury proceedings involving criminal tax investigations. The question though is whether, independent of DOJ Tax attorneys' participation in a grand jury investigation, can DOJ Tax attorneys conduct a criminal tax investigation? I can find no authority directly on the point, but the question is whether "proceedings" includes criminal tax investigations independent of the grand jury? I find no definition of the word proceedings, but the context suggests that no such authority is granted. The grant of authority seems to encompass proceedings either in court or in a grand jury.

The authoritative Webster Report (Webster Commission, Review of the Internal Revenue Service's Criminal Investigation Division (April 1999) from William H. Webster and the Criminal Investigation Division Review Task Force (often referred to as the “Webster Report”)) says "CI [IRS Criminal Investigation function] is the only agency that can investigate potential criminal violations of the Internal Revenue Code." (The portion of the Webster Report quoted is here.) This statement is echoed in other documents [e.g., TIGTA 2005 CI Report, p. 1 (“The CI function is the only law enforcement organization with the authority to investigate criminal tax violations.”)]. So, from all that I have been able to find, DOJ Tax is not authorized to conduct a criminal tax investigation.

Now, you might ask, who cares and why would this be important. I cannot know all contexts in which these questions arise, but in the KPMG criminal case, it appeared that the criminal tax investigation was not initiated by the IRS but rather by DOJ attorneys. The IRS had referred a summons enforcement matter to DOJ Tax for the limited purpose of enforcing summonses against KPMG. The DOJ Tax civil section attorney assigned to handle that limited function took it upon himself to invite DOJ Tax criminal section attorneys to the party, and thereafter the DOJ Tax criminal section attorneys began activity that seems to have been a criminal tax investigation. From their activities, the KPMG criminal case unfolded, even thought the IRS initially was unwilling to have it turn criminal. So the question was whether the DOJ Tax criminal section attorneys had improperly left the reservation, and, if they had, whether that tainted the resulting indictments. This issue never got resolved.

There are, of course, other issues involved in this scenario. For example, when the IRS made the limited referral to DOJ Tax for the summons enforcement, did the DOJ Tax civil section attorney assigned to the matter have authority to invite the criminal section attorneys to the party wholly independent of the issue of whether the criminal section attorneys could investigate a tax crime? Specifically, § 6103 unequivocally precludes the IRS from sharing IRS tax return information with DOJ except upon referral. When a limited referral is made, I doubt that that referral would be considered authority for any DOJ attorney working on the referral to then broadcast that information throughout DOJ Tax beyond the attorneys involved in the matter that was referred. But let's not get sidetracked on that issue right now. The district court in the criminal case recognized the issue, but declined to decide it because, it concluded, even if there were a § 6103 violation, the requested dismissal of the indictments was not an appropriate remedy. See United States v. Stein, 2008 U.S. Dist. LEXIS 74030 (S.D.N.Y. Sept. 10, 2008).

There is also a more directly related question. That question is whether any attorney in DOJ can conduct a criminal tax investigation independent of a grand jury investigation. I think the answer to that also has to be no for the reason noted in the Webster Report that IRS CI is the only agency authorized to conduct a tax investigation. Now, you might ask, why is this important and who cares? Well, the USAO attorneys (including Special AUSAs from DOJ Tax) assigned to assist the grand jury in the KPMG grand jury investigation claimed also that they were conducting a criminal tax investigation unrelated to the grand jury investigation in which they were assisting. Why did they claim that? So that the information they gathered in forced proffer sessions with subjects of the grand jury investigation could be obtained, they claimed, free of the secrecy requirement of Rule 6(e) of the Federal Rules of Civil Procedure. This claim is ludicrous if the USAO attorneys had no authority to investigate outside the grand jury context, so that whatever investigation they were undertaking in order to have the proffer sessions in the first place was the grand jury investigation we know they were undertaking.

4 comments:

  1. Jack,

    Here are my views in Q & A format:

    1. Does DOJ Tax have authority to conduct a criminal tax investigation independent of a grand jury investigation?

    A: Yes. The relevant CFR provisions allows the US DOJ's Tax Division to investigate alleged violation of the Internal Revenue Code upon the IRS's CID's completion of its administrative investigation and referral of the matter to the Tax Division. However, the relevant CFR provisions indicate that the US DOJ's Criminal Division has the authority to review and either grant or deny any application for use/derivative use immunity.

    2. Does DOJ Tax have authority to prosecute or authorize prosecution of a federal tax crime if the IRS does not agree with the prosecution?

    A: Yes, so long as the alleged offenses are violations of the Internal Revenue Code. If the proposed indictment involves offenses in addition to violations of the IRC, it appears that the US DOJ's Criminal Division as well as the appropriate US Attorney's Office must be consulted.

    3. Does the word "proceedings" encompass criminal tax investigations independent of a grand jury?

    A: Yes. In the absence of a specific and controlling statutory definition (or a definition in the US DOJ's regulations), the word "proceedings" must be construed and interpreted in accordance with its common usage. Ordinarily, the word "proceedings" is quite broad, and thus, a "creature of inclusion". Accordingly, it would be reasonable to conclude that the word "proceedings" includes by way of illustration, "investigative proceedings."

    OBSERVATIONS

    The US DOJ's construction of the word "proceedings" is considered to be authoritative (especially, if the same is used in a properly promulgated legislative or interpretive regulation), and thus, entitled to deference under the "Chevron Doctrine" because it is reasonable to construe the same as inclusive of "investigative proceedings."

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  2. Anonymous,

    1. You say that DOJ Tax has authority under "the relevant CFR provisions." Could you please cite what they are? In this regard, I am confident that DOJ Tax reviewed Webster's report and would have corrected him on it when he said that IRS CI was the only agency authorized to conduct tax crime investigations. And, as you know, DOJ Tax has attorneys that, in the criminal area, consider referrals from the IRS, act as attorneys for the government in grand jury investigations and try criminal tax cases. But, so far as I know, they have no general authority independent of their work with a grand jury to conduct criminal tax investigations. Thus, independent of the grand jury, DOJ Tax has no compulsory process and has no investigators. The FBI is prohibited from investigating tax crimes. Thus, the system and the total lack of specific authority in the CFR suggests to me that, in fact, they have no such independent investigative power. If there is authority for the position you assert that they do, I would appreciate your either posting it here or sending it to me.

    2. You say that DOJ Tax does have authority to prosecute tax crimes without IRS approval. The CFR to which I link above certainly does not prevent the IRS from prosecuting in the absence of concurrence from the IRS. So, looking at that alone, DOJ Tax is not prohibited from doing so. But, if the purpose of the criminal tax laws is to undergird the tax system administered by the IRS, the IRS' disapproval of prosecution would suggest that DOJ Tax should not prosecute but that still does not alone answer the question of whether it can prosecute. I do have an anecdotal suggestion. The KPMG investigation was conducted by the grand jury (at least that part of it that was not conducted by the DOJ Tax attorneys before the grand jury investigation was authorized). When the decision was made to indict, those who had requested a meeting with DOJ Tax were offered the opportunity to come in to that meeting. In the initial telephone conversation to schedule the meeting, I mentioned that we wanted to make the case against the recommendation of USAO SDNY to indict my client. At that point, the DOJ Tax attorney advised me that the recommendation to prosecute was from the IRS, not USAO SDNY whose attorneys (including Special AUSAs from DOJ Tax) had conducted the investigation. She told me that DOJ Tax only considered recommendations to indict from the IRS not any USAO. That led me to wonder whether they could indict without that recommendation from the IRS. And, a further side note on the KPMG indictments, a statement from the Commissioner's representative assigned to have some involvement with the grand jury (Cono Namaroto), told a friend of mine that he had personally made the decision as to who would be indicted. At the time, Mr. Namorato was with the IRS as head of OPR, but as respecting the grand jury, he was the Commissioner's person choice to interface with the grand jury. As respects all of this anecdotal and perhaps not directly relevant information, I continue to wonder whether DOJ Tax can prosecute a tax crime without the approval of the IRS. I don't think I have a clear answer to that unless the notion is that, in the absence of express written denial of that authority, DOJ Tax must have the residual authority to prosecute in the absence of an affirmative recommendation from the IRS.

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  3. Is this blog still active?

    ReplyDelete
  4. Anonymous,

    The Federal Tax Crimes blog is still active.

    Are you asking whether the particular blog on DOJ Tax authority is active. Anyone can post comments anytime, and I encourage you to post a comment if you have one on this subject. Readers can still find the topic by a search on the site or search on Google and then can read the comments. So, in that sense, it is active and open for comments that will be read by others.

    The problem, of course, is that chronologically, it is an old blog topic and thus will be found only by searches.

    Thanks for the inquiry.

    ReplyDelete

Please make sure that your comment is relevant to the blog entry. For those regular commenters on the blog who otherwise do not want to identify by name, readers would find it helpful if you would choose a unique anonymous indentifier other than just Anonymous. This will help readers identify other comments from a trusted source, so to speak.