Monday, June 10, 2013

Ex Post Facto "Correction" by Delinquent or Amended Returns After the CI Agent Shows Up (6/10/13)

One of the tough issues practitioners face when a criminal investigation starts is whether to attempt to "correct" the issue ex post facto by filing delinquent original returns (if failure to file is the potential crime being investigated) or amended returns (if evasion or tax perjury are the crimes being investigated).  Conceptually, such ex post facto gambits are generally suspect; otherwise, the IRS criminal tax enforcement efforts would be in shambles.  And, of course, the filing of such returns ex post facto does prove several elements other than willfulness that the Government must prove to make a case.  For example, in the case of failure to file, the filing of delinquent returns will admit that the taxpayer was required to file a return and the income admitted on the returns can be compelling to a jury.  Likewise, in the case of evasion or tax perjury, the filing of amended returns showing a tax due -- substantial tax due in virtually all cases that would be criminally prosecuted -- the taxpayer is admitting that element of the crime (either the tax due for evasion or the tax or components leading to tax, such as the omitted income, for tax perjury).

In United States v. Sperrazza, 2013 U.S. Dist. LEXIS 77901 (MD GA 2013), here, the defendant made tax payments after he learned of the IRS criminal investigation.  The defendant was subsequently charged with structuring financial crimes and evasion.  As to the evasion charges, the defendant intended to rely upon his tax payments when he "learned" that they were underpaid (i.e., after he learned of the criminal investigation).  Obviously, he wanted the jury to infer that he acted in good faith from the beginning by showing that he corrected the problem when he learned of it.  That is one inference the jury could make; the competing inference is that the defendant was just trying to create an improper inference. The Government moved in limine to prevent him from introducing evidence of payment.  The Court denied the motion, thus allowing the defendant to introduce that evidence and get that inference before the jury.  The Court's reasoning is short and sweet, so I included it in whole here:
Presently pending before the Court is the Government's Motion in Limine to Exclude Irrelevant Evidence (Doc. 51). The Government seeks to preclude Defendant from arguing or introducing documents or testimony related to tax payments he made to the IRS after he became aware of the criminal investigation. (Doc. 51 at 1.) The Government argues that Defendant filed his tax payments for a self-serving purpose after being informed of the criminal investigation, rendering Defendant's late payment of taxes irrelevant to the issue of whether Defendant had the requisite criminal intent to commit the crime. The Government also argues that admission of evidence of the payments is greatly prejudicial as it will confuse the jury and distract from the charged crimes. Defendant asserts that he never received an audit notice for the years in question, was presumably unaware of the criminal investigation until notified, and filed his amended returns and payments in 2009 upon notification, well before the Indictment was returned on March 15, 2012.
On June 3, 2013, the Court held a hearing on the Government's Motion. At the hearing, the parties agreed that evidence of the late tax payments was irrelevant to the charges of structuring financial transactions (Counts Four and Five). Thus, the only question is whether the Court should exclude evidence of the late tax payments as to the tax evasion charges under 26 U.S.C. § 7201 (Counts One, Two, and Three). 
In light of the binding precedent set forth in Hill v. United States, 363 F.2d 176 (5th Cir. 1966), the Court will permit the admission of evidence of the late tax payments only as to Counts One, Two, and Three. In Hill, a tax evasion case under 26 U.S.C. § 7201, the Fifth Circuit ruled that "[o]n the issue of willfulness the prompt correction of making tax payments is relevant...[and] where a defendant has an opportunity to correct his return and is put on notice that such correction is necessary, his failure to take steps to file an amended return is a proper matter for a jury to consider in determining intent or lack of intent." Hill, 363 F.2d at 180. Thus, the evidence of tax payments post-notice can be of probative value in establishing a defendant's state of mind at the time of the alleged criminal acts. United States v. Tishberg, 854 F.2d 1070, 1073 (7th Cir. 1988) ("Tishberg's subsequent conduct may demonstrate a good faith effort to correct his previous mistakes."). In the instant case, where Defendant was put on notice of his flawed tax returns only after being informed of the criminal investigation, his resulting tax payments may have probative value on the question of willfulness as to Counts One, Two, and Three. While the Government argues that such evidence will be prejudicial and confuse the jury, none of the cases cited support the Government's position. Each case cited by the Government involves a prosecution under 26 U.S.C. § 7203, which addresses willful failure to file an income tax return or pay taxes. Under § 7203, evidence of late filings and payments of taxes have generally been considered inadmissible, as the conduct of a defendant in the years subsequent to a failure to file tax returns has little relevance to the original failure to file a tax return, and "the intent to report...income and in the future does not vitiate the wilfulness required by [§ 7203]." Sansone v. United Stated, 380 U.S. 343, 345 (1965). The same cannot be said of § 7201, where the original crime is of tax evasion and subsequent conduct can implicate willfulness or support the lack of willfulness as the Court noted in Hill. The Government's argument that the payments in this case were self-serving goes to the weight of the evidence, not its admissibility, and of course, the Government is free to argue that the payments were self-serving. Ultimately, what weight, if any, to be given to the tax payments is for the jury to determine together with all the other evidence. 
Accordingly, the Court DENIES IN PART the Government's Motion in Limine (Doc. 51) to the extent that the Court will permit the admission of evidence of the late tax payments only as to Counts One, Two, and Three. The Court GRANTS IN PART the Government's Motion in Limine (Doc. 51) to the extent that the Court will not permit admission of evidence of the late tax payments as to Counts Four and Five. The Court will also issue an appropriate instruction to the jury that they are not to consider the matter of late payments as to Counts Four and Five.
JAT Comments:

1.  I am not sure I understand or, to the extent that I do understand, agree with the court's distinction between failure to file and tax evasion relative to ex post facto corrective action.  If a defendant can raise an inference of lack of willfulness in his original conduct by ex post facto amended returns or payments of taxes, it is not clear to me why the same reasoning would not apply to willfulness in failing to file a return.  Perhaps readers will respond either by email or comment to enlighten me on that.

2.  Obviously, the Government can argue to the jury that the inference is misplaced because the defendant did not initially do the right thing and only sought to create a smokescreen of good faith when he saw he was going down.  But, good faith in light of all the circumstances is uniquely an issue for the jury to decide.

3.  Even if this type of ruling can be anticipated at the ensuing criminal trial, this type of ex post facto correction -- delinquent returns or amended returns -- is dicey.  I don't think it happens in most cases because of the risks and uncertainties involved, particularly if there is some doubt about the Government being able to prove elements of the crime that will be admitted by the filings.

4. Query, assume a guilty client (actually guilty of all elements of the tax crimes in issue).  Could the filing of the delinquent or amended returns in order to create an improper inference that his original conduct was not willful be considered an affirmative act for the original evasion or even a new act or evasion or even an attempt to impair or impeded the IRS, constituting a separate crime under tax obstruction (Section 7212) or tax conspiracy (18 USC 371, the defraud/Hammerschmidt/Klein conspiracy?  Editorially, the latter possibility, certainly within the sweeping scope of the Klein / Hammerschmidt rhetoric, is a good reason that the defraud conspiracy should be reined in.

5. The foregoing paragraph raises some nice theoretical issues,  Perhaps the more practical issue is whether, after the defendant has been found guilty of the willfulness he sought to avoid by the ex post facto conduct, he can be found liable for obstruction in the investigation or prosecution with a resulting 2 level  increase under Sentencing Guidelines §3C1.1., Obstructing or Impeding the Administration of Justice., here.  Certainly, to use the easiest example, if a defendant takes the stand at trial and testifies falsely that he did not willfully do the actus reus, the court can impose this sentencing level enhancement if the jury finds him guilty which, perforce, means that he testified falsely.  Why?  That enhancement cannot apply to the defendant who simply puts the Government to its proof of guilt beyond a reasonable doubt, a constitutional mandate in criminal cases.  But, whenever the defendant does something affirmative in the defense -- illustrated most clearly by false testimony -- that seeks to mislead the jury, then this enhancement can apply.  Thus, in this case, when the defendant affirmatively introduces evidences of the ex post facto conduct of payment for the sole reason of raising an inference -- in effect, "testifying" to that effect through the conduct he insists putting before the jury -- then, has the defendant gone beyond his constitutional right to require the Government to prove guilt beyond a reasonable doubt and proffered evidence intended to mislead and thus obstruct justice?  Perhaps I will write another blog on that subject later.  For now, I raise the possibility and would appreciate readers thoughts.

Addendum on 6/11/13:

6.  I am a bit troubled by the quote from Hill that suggests that the Government may be able to introduce an ex post facto failure to correct as evidence of the original willfulness in making the error needing correction.  Here is the entire discussion in Hill from which the excerpt above was taken.  Here is Hill's complete discussion (pp. 180-181), and have bold-faced some of it for emphasis in this context:
The corporation's accountant prepared both the corporation's return and Hill's personal return. The corporation's return was filed on April 16, 1958 and Hill's return was filed on March 25, 1958. The accountant testified that in May of 1958 he met with Hill, White and Marcussen, at which time he was informed by White that Hill, White and Marcussen had cashed checks belonging to the corporation and divided the proceeds among themselves, as reimbursement for business expenses which each previously had incurred. The accountant then testified that he advised White, Hill and Marcussen to file amended personal returns to report the receipt of their respective shares of the proceeds of the cashed checks; and that he cautioned them to claim reimbursement for business expenses only by using journal entries properly supported by expense statements. Hill contends that this testimony was inadmissible because it dealt with events which occurred after the returns in question had been filed. Hill assumes that because the offense of tax evasion was complete upon the filing of his tax return, all statements, acts and omissions which occurred thereafter are inadmissible. We do not agree.
In proof of criminal tax evasion the defendant's intent is a necessary element. Evidence which is relevant and otherwise admissible to determine willfulness is not made inadmissible merely because the act or omission offered occurred shortly after the returns in question were filed. United States v. Northern, 329 F.2d 794 (6th Cir. 1964), cert. den. 377 U.S. 991, 84 S. Ct. 1915, 12 L. Ed. 2d 1044 (1964). On the issue of willfulness the prompt correction of errors by filing amended returns and by making tax payments is relevant. See Berkovitz v. United States, 213 F.2d 468, 472 (5th Cir. 1954) and Heindel v. United States, 150 F.2d 493, 497 (6th Cir. 1945). Conversely, where a defendant has an opportunity to correct his return, and is put on notice that such correction is necessary, his failure to take steps to file an amended return is a proper matter for a jury to consider in determining intent or lack of intent. In United States v. Alker, 260 F.2d 135, 157 (3rd Cir. 1958), it was said: 
The law is well settled that prior and subsequent acts whether they portray criminality or not when substantially similar to the subject matter forming the basis of the indictment are probative to negate the inference that the crucial conduct was unintentional, innocent, inadvertent or the product of [a] mistake. 
We reject this assigned error for a second and entirely different reason. When Hill testified in his own behalf, he substantially repeated the accountant's testimony which is complained about in this assignment. If there was any error in the admission of the accountant's testimony, it was cured by Hill's testimony to the same facts. See Barshop v. United States, 192 F.2d 699 (5th Cir. 1951), cert. den., 342 U.S. 920, 72 S. Ct. 367, 96 L. Ed. 688 (1952). Thus we find no prejudicial error in the admission of the accountant's testimony, or the trial court's refusal to withdraw it from the jury's consideration. 
I am troubled by the notion that the Government could rely on such an omission in the context of a CI investigation a couple of years after the acts in question as evidence of original willfulness.  There may be a number of reasons the taxpayer would not file an amended return in that context and thus any inference of guilt from the omission is attenuated.  Of course, the reverse is true -- if the taxpayer corrects, any inference of innocence may be attenuated.  I would appreciate the readers' comments on this issue.

1 comment:

  1. What about cases in which the taxpayer amends returns and pays the tax before the IRS becomes aware of the problem? I am thinking of this in the context of OVDI. In truly voluntary disclosures (I am excluding those who were informed that their details were about to be disclosed) the taxpayer pays back taxes, and I seem to recall that somewhere in the IRM it says that no FBAR penalty should be assessed if taxes have been paid. Not that if taxes have been paid at the time they were due, but if taxes have been paid, period.


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