Court Holds that Civil Agent Did Not Continue Investigation Too Long and Even If Deceptive Did Not Prejudice Defendant (5/2/15)

In United States v. Hee, 2015 U.S. Dist. LEXIS 54971 (D. Haw. Apr. 27, 2015), here, the Court denied various defense motions.  I discuss here the denial of the motion to dismiss the indictment based upon the alleged improper use of the civil tax audit to conduct the criminal tax investigation.  Tax crimes enthusiasts will know that this general genre of argument is based on United States v. Tweel, 550 F.2d 297 (5th Cir. 1977), here, and its progeny.  Hence, the court starts its analysis as follows:  "The court's analysis of Hee's claim of improper revenue agent conduct begins with United States v. Tweel, 550 F.2d 297 (5th Cir. 1977)."  First, the facts, highly summarized.

Two IRS agents were in the initial stages of conducting audits of corporations related to the defendant, Hee.  The had limited initial contact with each other.  One of them noticed early, however, that "there was a $324,684 difference between" the payments reported by one corporation to the other and the income reported by the other corporation.  "This difference turned out to stem from different accounting methods for reflecting management fees."  So, no fraud there.

Five months into the audit, one of the agents discussed the possible referral of the case to CI with her On the Job Instructor, her manager and the fraud technical advisor.  The FTA "said 'no,' indicating that the information Carey presented did not demonstrate corporate fraud and that more facts were needed before anyone could say that Hee might be liable for fraud. Carey was told to consider examining Hee's personal tax returns."

The agent then visited with the corporation's CPA, on the POA, who allegedly told the agent:  "Mr. Hee and he had talked about keeping receipts and other forms of documentation, and that 'Mr. Hee was aware of the requirements,' but choose to 'close deals with handshakes' and would rather 'play the odds' of being audited rather than keep records."

The agent then received permission to audit Hee's personal returns.

Another CPA, also on POA, then called the agent's acting manager and made the allegation that the agent had told him -- the POA - that Hee had committed fraud.  In a later discussion between the acting manager and the agent, the agent disputed the statement, saying that he had told the POA that "things look bad, and that we should try to solve as many things at my level as possible."  Apparently in a subsequent call with the POA, the POA "conceded" that the agent had not referred to fraud.

The agent then later met with the FTA and agreed to write up the referral to CI on Form 2797, "Referral Report of Potential Criminal Fraud Cases."  (Although not discussed in the case, for the procedures on the preparation of this form, see IRM 25.1.3 Criminal Referrals, here.)

At that point, the agent did not continue the investigation.

Finally:

On November 4, 2009, Yanagihara [the POA] left a voicemail for Carey [the agent] asking about the status of the audits of Waimana Enterprises and Clearcom. Carey returned the call. Instead of discussing the status of the audits, Carey told Yanagihara, "Hi Danielle, this is Crystal Carey from the IRS, returning your earlier phone call regarding Waimana Enterprises and Clearcom. In regard to time frames, my manager has asked me to work on another time sensitive matter, and I will have to get back in contact with you at a later date regarding resolution of the Waimana and Clearcom exams."

The Tweel issue usually arises in the context of the IRS obtaining damaging information from continuing civil investigation after firm indications of fraud -- the normal point to refer to CI.  The Tweel issue is presented via a motion to exclude the damaging information.  Often that motion, if successful, will sufficiently impair the Government's criminal case that the indictment may be dropped or certain counts may be dropped.  But that is not the context here, because the Court found that the agent did not continue the investigation after the fraud referral and the Court found that there was not sufficient evidence to warrant an evidentiary hearing on the issue of whether the agent should have stopped the investigation and referred previously.  Indeed, on the latter point, the Court reasoned:

Calling Carey's investigation a "secret criminal tax investigation," Hee argues that the IRS manual actually allowed Carey to obtain evidence for Hee's criminal charges under the guise of conducting a civil audit. He says that his company's CPAs were required by Treasury Department Circular No. 230, 31 C.F.R. § 10.20(a)(3), to comply with Carey's requests for information so long as the requests were proper and lawful and did not seek information that was privileged. See ECF No. 60-6, PageID # 463. Hee says that Carey lied to his company's CPA in November 2009 about the status of the audit. See id., PageID # 362. 

According to Hee, Carey secretly intended to use whatever she discovered for a criminal prosecution. Hee claims that the information sought by Carey from the CPAs was not lawful, but that the CPAs did not know they should refrain from complying with the requests, given Carey's failure to disclose her alleged plan.  Hee asks the court to conduct an evidentiary hearing to examine Carey's intent. See ECF No. 50-1, PageID # 317. 

An evidentiary hearing is required when, in moving to dismiss an indictment on the ground of government misconduct, a defendant raises a material issue of fact that would entitle the defendant to relief if the facts were resolved in accordance with defendant's contentions. See United States v. Irwin, 612 F.2d 1182, 1187 (9th Cir. 1980). What has become clear to this court through a nonevidentiary hearing on whether to conduct an evidentiary hearing is that Hee's motion does not turn on evidence specific to the present case. Hee acknowledged that Carey's actions complied with the IRS manual, but that the IRS is always looking to bring criminal cases. In short, Hee is seeking an order with reasoning under which any indictment preceded by a civil audit would be declared improper. In seeking such an order, Hee is not relying on factual detail about Carey in particular. 

Pressed at the hearing to indicate when Carey might have had sufficient indicia of fraud to be required to cease collection activities, Hee could only concede that, as of October 22, 2008, when Carey was told by the fraud technical advisor that a fraud case was not viable, Carey did not have sufficient indicia of fraud. At most, Hee argued that, as of November 5, 2008, when Carey was told by one of Waimana Enterprises' CPAs that Hee did not keep receipts and chose to close deals with handshakes and "play the odds" of being audited, there was sufficient indicia of fraud. This court disagrees. By themselves, the lack of receipts and closing of deals with handshakes are not sufficient badges of fraud to warrant a criminal investigation referral. Hee simply fails to allege "facts with sufficient definiteness, clarity, and specificity to enable the trial court to conclude that contested issues of fact exist." United States v. Howell, 231 F.3d 615, 620 (9th Cir. 2000). 

Of course, this court understands that no defendant can be in a position to make an airtight case as to what an evidentiary hearing might reveal, but an evidentiary hearing is not available just for the asking. Hee must make some showing that Carey had the alleged secret intent. A mere supposition is insufficient, but that is all Hee offers.

But, what about the last telephone call from the agent to the POA (which apparently was either recorded or a voice mail message) in which the agent was less than forthcoming about the status of the matter -- specifically its referral to CI.  The Court took a no harm, no foul approach:

While Hee complains that Carey did not tell Waimana Enterprises' CPA on November 4, 2009, that the matter had been referred for a criminal investigation on October 22, 2009, instead stating that she was working on [18]  another matter, nothing in the record establishes that Carey continued to collect evidence from Waimana Enterprises, Hee, or any of Hee's associates after September 20, 2009, when the decision to "write up F2797" was made. The court does not determine here that there was "misleading" of any CPA, but even if "misleading" occurred in the fall of 2009, it could not have prejudiced Hee given the absence of additional information obtained by the IRS on or after September 30, 2009.

I call readers' attention to United States v. Rutherford, 555 F3d 190 (6th Cir. 2009), here, rehearing and rehearing en banc den., 2009 U.S. App. LEXIS 12986 (2009), which might suggest a re-focus of the Tweel issue analysis.  The Rutherford Court’s reasoning is quite good.  The Court did acknowledge the cases hold that affirmative misrepresentations, if made, might impact the proper inquiry of coercion, but no such misrepresentations occurred in the case. Moreover, even affirmative misrepresentations may not control the inquiry, because the Supreme Court has held that mere deception will not violate the interviewee’s rights; the issue is still whether the interviewee made the statement voluntarily.   Here is the conclusion:

The Due Process Clause is not violated here where there was no deception or trickery and where defendants' statements were clearly voluntary. IRS agents did not engage in any affirmative misrepresentation, and to the extent that the very use of civil examiners silently misrepresented the nature of the government's investigation, the defendants have presented no evidence indicating that they relied upon the regulation so that their statements were not voluntary. In short, though government misconduct is regrettable, whether engaged in deliberately or, as here, merely negligently, the misconduct at issue in this case simply does not "shock[ ] the conscience." Rochin v. California, 342 U.S. 165, 172, 72 S. Ct. 205, 96 L. Ed. 183 (1952). If a remedy does exist, it is not one this court may impose by application of the exclusionary rule. We therefore REVERSE the district court's pre-trial motion suppressing statements and documents and REMAND for further proceedings consistent with this opinion. 

Readers might also be interested in the Hee Court's earlier order denying the U.S. motion to disqualify counsel, here.

JAT Comments:

1.  As I said, the Tweel issue usually comes up in a motion to suppress that, if successful, then renders the prosecution unviable, thus resulting in dismissal at the request of the prosecutor.  In Hee, the defendant, according to the opinion, sought dismissal as its first request for relief and only suppression alternatively.  I am  not sure that dismissal as a sanction for violation of the IRM's requirement that the civil agent refer to CI upon firm indications of fraud.  Accordingly, it seems to me, the proper motion would be to suppress and then let the cards fall where they may.  Of course, the defendant would prefer dismissal of the indictment, but it just seems to me that dismissal of the indictment is not the appropriate court-ordered sanction in these cases.  (In fairness to the defense team, the members of the team are some of the best criminal tax attorneys in the country, so I can't say that they made the wrong judgment call in asking the Court to dismiss.)

2.  IRM 25.1.3.2, Preparation of Form 2797 - Referral Report of Potential Criminal Fraud Cases  (May 27, 2014), here, provides:

If after consultation with the FTA, it is determined that a potential fraud case has firm indications of fraud/willfulness and meets criminal criteria, the compliance employee will suspend the examination/collection activity without disclosing to the taxpayer or representative the reason for the suspension. When the taxpayer asks if a fraud referral is being considered or whether CI is involved, the examiner or revenue officer must not give a false or deceitful response. Guidance from the courts provides that compliance employees:
• May decline to answer questions about criminal potential
• May not deceive taxpayers when asked specifically about the character or nature of an investigation
• Are not required to initiate disclosure about developing indicators of fraud or a potential referral to CI, or
• May simply advise that when firm indicators of fraud are present, a referral to CI is required

3.  What if the following had occurred:  The civil agent had a suspicion of fraud and thought that referral was appropriate.  Nevertheless, the civil agent thought that the taxpayer might be able to explain.  Accordingly, the civil agent asks for an interview.  The practitioner asks "Is there a CI referral?" or some similar question.  Since there has been no CI referral, the agent can honestly answer "no."  On that basis, the taxpayer's practitioner advises the taxpayer that, although the practitioner and taxpayer are aware of the potential criminal potential in the case, an interview might be appropriate in the hope that cooperation will placate the agent enough to avoid a referral which the agent has not acknowledged and the practitioner only suspects is a possibility.  In the interview, the taxpayer either lies or tells the damaging truth.  The agent then refers the case.

1. Should the taxpayer -- then defendant -- be able to suppress?
2. Would the answer be different if the agent had just completed a first draft of the Form 2797, but had not yet finalized the Form for submission to his group manager and the FTA?
3. Would the answer be different if the question when the interview is requested were "Do you have a firm indication of fraud?"
4. The danger in such interview contexts is that the taxpayer is not given the modified Miranda warnings that the CI agent would have given at the start of any interview.  See  Miranda v. Arizona, 384 U.S. 436 (1966), here (custodial setting); and Beckwith v. United States, 425 U.S. 341 (1976), here (noncustodial setting of IRS interview; see particularly Justice Marshall's concurrence), Those modified Miranda warnings are (IRM 9.4.5.11, Rights of Witnesses and prospective Defendants During Interview (and its subparts) (May 15, 2008), here):

In connection with my investigation of your tax liability (or other matter), I would like to ask you some questions. However, first I advise you that under the Fifth Amendment to the Constitution of the United States, I cannot compel you to answer any questions or to submit any information if such answers or information might tend to incriminate you in any way. I also advise you that anything which you say and any documents which you submit may be used against you in any criminal proceeding which may be undertaken. I advise you further that you may, if you wish, seek the assistance of an attorney before responding. Do you understand these rights? 

This issue is not so exacerbated in a civil agent interview where the taxpayer is represented by a seasoned practitioner, preferably a lawyer.  However, it can be a problem where the taxpayer is not so represented.

5.  In the setting in 4, most cases resolve the issue by avoiding it -- i.e., by making a finding that, at the time of the interview(s), the civil agent (revenue agent) had no firm indication of fraud sufficient to require a referral.  But, even when thus avoiding the issue, the courts sometimes caution the IRS to comply with the referral requirement once there is a firm indication of fraud and that failure to do so and proceeding without giving the modified Miranda warnings would constitutionally require suppression.  The notion is that, in view of the constitutional imperatives in Miranda (see particularly Dickerson v. United States, 530 U.S. 428 (2000), here.) and the particular application of those imperatives to noncustodial IRS interviews reflected in the IRM, at least the modified Miranda warnings are required and, in a variation on that theme, because the IRS has assured taxpayers and the practicing community that its agents will refer once there is a firm indication of fraud, a civil agent proceeding beyond that point is obtaining evidence by misrepresentation or fraud, trickery or deceit.  In short, there has to be some line in this area, the IRS has drawn the line in the IRM, and, while it might not be the only line that could be drawn, it is one that is sensibly drawn in the unique area of IRS investigations and does address the constitutional imperatives in Miranda.  It is a line that should be respected and the sanction for crossing that line should be suppression.   Nevertheless, the trend seems to be that courts hold that there is no suppression sanction for violating the IRM requirement in the absence of some affirmative deception rising to the level of improper coercion.