Consider the application of this rule [permitting estimates of the tax loss for the tax loss calculation] where the tax offense is failure to file rather a fraudulent return omitting income or misstating claimed deductions or credits. If the defendant originally filed a fraudulent return without claiming otherwise available deductions or credits, I suppose that some sense of fairness could support denying the deductions or credits since the tax loss the defendant intended was not affected by the unclaimed deductions. But, if the defendant filed no return, is he or she to be further punished in the sentencing phase by rigid estimates simply because he or she did not claim the deductions? I can certainly make a distinction between the two circumstances.
In a recent case [United States v. Delfino, 510 F.3d 468 (4th Cir. 2007), cert. denied ___ U.S. ___, 129 S.Ct. 41 (2008)], the Fourth Circuit held that a defendant can be denied deductions after failing to file. It is important to note that the appeal involved a conviction for tax evasion, not for failure to file. As I noted earlier in this text, tax evasion convictions where the taxpayer has failed to file are rare. The Court reasoned:
• The Court adopted the reasoning in Chavin [United Stats v. Chavin, 316 F.3d 666, 677-679 (7th Cir. 2002)] that the tax loss is the intended tax loss rather than the actual tax loss. This appears to be semantics in a failure to file case – although this was an evasion conviction the taxpayer had never quantified under oath the deductions to which he was entitled. In other words, there is a point of reference for making the calculation as to “intent” with a filed return that point of reference does not exist for a return that is not filed.
• In the final analysis, the Court seems to have simply punted on the issue rather than require sentencing courts to compute tax liabilities with more detail. The Court thus concluded its discussion.
Making judgment calls about a more accurate computation of taxes is not dissimilar to what sentencing courts do all the time with financial crimes that involved a great deal more uncertainty than tax computations. Taxes are not that complex – indeed, even with their complexity, Congress still imposes upon the ordinary citizen the responsibility of filling them out with such assistance as may be needed. The sentencing process is more than vigorous enough to assist in generating a good tax number for sentencing purposes. Federal judges are up to this task.The Delfinos chose not to file their income tax returns. They also chose not to cooperate with the initial IRS audit, at which time they could have claimed deductions to which they were entitled. By doing so, they forfeited the opportunity to claim these deductions. Were the district court now to attempt to reconstruct the Delfinos' income tax returns post hoc, it would be forced to speculate as to what deductions they would have claimed and what deductions would have been allowed. This would place the court in a position of considering the many “hypothetical ways” that the Delfinos could have completed their tax returns. Chavin, 316 F.3d at 678. The law simply does not require the district court to engage in this speculation, nor does it entitle the Delfinos to the benefit of deductions they might have claimed now that they stand convicted of tax evasion.
What troubles me most about this rhetoric is that it seems to offer license to sentencing courts for sloppy thinking in this key component of the sentencing decision. And, it leaves open the door for sentencing to turn upon taxes that the taxpayer does not owe.
Perhaps a more solid ground to deny some deductions – specifically itemized deductions when the taxpayer fails to file a return is the Code requirement that itemized deductions be claimed on the return. If there is no return, then technically the taxpayer – the defendant in the sentencing proceeding – is not entitled to claim itemized deductions that he or she almost certainly would have elected had he or she filed a return. Section 83(e); Jahn applies this in a civil case. All other things being equal, one might surmise that this rule would apply in a criminal failure to file case in the tax loss calculation, denying the defendant the benefit of the itemized deductions which could have substantially lowered his tax liability and resulting guideline range. Where this is a potential problem (it won’t be if the itemized deductions are not sufficiently large to reduce the base offense level), a defendant might consider filing the return immediately upon the conviction. One problem is that the filing of the return might then be used as an admission in the event the case is subsequently remanded for another trial. Moreover, since the return must be true complete and accurate, the defendant may not want to file if he or she is aware of facts that produce tax liabilities that are in excess of the tax loss determined by the Government and submitted to the Probation Officer and the Court. Think it through before you file.
Finally, one additional strategy to get the Probation Officer or the Court to consider itemized deductions in a failure to file situation is to stress that the sentencing tax loss is in the “intended” tax loss. Certainly, it is unreasonable to believe that a taxpayer cheating by failing to file his or her tax returns intended to cheat on an amount that would not have been due had he or she filed his or her tax return and claimed, lawfully, the itemized deductions. Worth a try.