Thursday, July 8, 2010

More on HSBC Initiative and DOJ Tax Division Authority to Conduct Criminal Tax Investigations

The Wall Street Journal has an article today here with further discussion of the new HSBC initiative which I discussed earlier here. I just want to focus on one picky point in the article. The article quotes the DOJ Tax Division letter (signed by himself, Kevin Downing) as concluding with the following: "You are further advised, that you are the subject of a criminal investigation being conducted by the Tax Division."

As I discussed in a prior blog here, I question the authority of the Tax Division to conduct a criminal tax investigation. A grand jury can certainly conduct a criminal tax investigation, but I presume that, if Mr. Downing were acting as a designated attorney for the grand jury, he would have had to identify himself as doing so and stated that the investigation was a grand jury investigation. That is not what he says. So I guess he is acting, as he says, under some authority that he assumes the Tax Division has to conduct criminal tax investigations. If he is right, then I am wrong.

One other thing I do note with respect to these supposed DOJ Tax criminal tax investigations -- there seems to be a glitch in the secrecy safeguards around tax matters.  Criminal tax investigations conducted by the IRS are covered by Section 6103; criminal tax investigations conducted by the grand jury are covered by Rule 6(e); criminal tax investigations conducted by the Tax Division are not covered, meaning, I suppose, that information and documents gathered in such investigations may be disseminated as DOJ Tax and its attorneys see fit.  I don't think that is the right result if one considers the spirit of Section 6103 and Rule 6(e) in the context of criminal tax investigations.  Which may be a good reason to question DOJ Tax's claim of authority to conduct such investigations.


  1. Jack, good post again. However, and maybe its me, but I found your post a little confusing as one interested in the criminal tax area, but unfamiliar with its nuance. Perhaps you might expound on what you mean by the "spirit of Section 6103 and Rule 6(e) in the context of criminal tax investigations" for the benefit of the plebs? Thanks much.

  2. A reader (Anonymous) asked that I "expound on what you mean by the "spirit of Section 6103 and Rule 6(e) in the context of criminal tax investigations."

    Section 6103 of the IRC is a statute requiring that tax information be secret and available outside the IRS only under strictly limited conditions. The underlying congressional policy determination is that citizens will more willingly comply with their tax obligations if they are reasonably assured that the information they provide the IRS with respect to their tax obligations is not shared with other governmental agencies and even outside the government. This was particualrly a problem during the Nixon administration where the IRS was viewed as a lending library to other government agencies, including the White House for political purposes. Section 6103 strictly confines such use of tax information subject to exceptions (many) that Congress has specifically authorized within Section 6103.

    Federal Rules of Criminal Procedure Rule 6(e) is the rule requiring secrecy for grand jury matters. Tomes have been written on the subject of what "grand jury matters" means (the Government thinks it means whatever the Government says it means in any given context), the point is that the fruits of grand jury investigation would be grand jury matters subject to secrecy except in the narrow circumstances permitted for disclosure.

    Rule 6(e) was not designed with the policy concerns of Section 6103 in mind, but it does complement and further the goals of Section 6103 in a criminal tax investigation setting. It assures that tax information developed in a grand jury investigation are not braodcast to the world.

    If DOJ Tax has the authority to conduct criminal tax investigations, there is no such complementary secrecy requirement for tax information that shores up the policy in Section 6103. By conducting criminal tax investigations within DOJ Tax rather than the IRS, DOJ Tax could then becoming the "lending library" for such tax information and thereby defeat the clear and unequivocal policy of Section 6103. I have little doubt that, if Congress thought DOJ Tax could really investigate tax crimes independent of the IRS and a grand jury, it would sweep DOJ Tax under Section 6103. Of course, Congress like most or at least many practitioners did not imagine that DOJ Tax claimed the authority to conduct criminal tax investigations independent of a grand jury and the IRS.

  3. Thank you for the helpful clarification. But what happens when the criminal case ends, let's say in no indictment or is terminated, how is the information shared for the civil case. Or must the Government start all over again, which seems to be an enormous waste of time. While the criminal case may be important, the money is in the civil case, which, to me, is far more important, especially if you believe, as I do, that bringing these criminal tax cases have little or not deterrent effect for non-involved parties. I would be interested in your views on this.

  4. Grand jury matters can be shared only in any criminal proceeding coming out of the grand jury investigation or pursuant to a Rule 6(e) order which the Government would have to obtain and could do so only upon showing exigent circumstances. A civil tax audit would not normally be exigent circumstances permitting a Rule 6(e) order. Hence, in some sense, a grand jury investigation terminating without any court proceeding or a limited court proceeding would have a large amount of information in a black hole for civil tax purposes. The IRS would have to go out and recreate the wheel for the information.

    That is why the Government strains to avoid putting anything into a grand jury investigation if it can avoid doing so. Keep in mind that, if it is developed in an IRS criminal investigation, it is automatically available for civil tax use. If it is developed in a grand jury investigation, it is not available generally for civil tax use unless it is used in public proceedings after indictment or a Rule 6(e) order is obtained.

    This is precisely why the DOJ wants some intermediate level of investigatory powers where it is unfettered by these restraints and become the lending library for the Universe (most likely, specifically back to the IRS).

    In the KPMG case, for example, the Government strained to make it appear that the prosecutors who were, by the way, attorneys for the grand jury, were acting in another capacity, while conducting the proffer sessions. The prosecutors never articulated what that other capacity was, but it is likely it was this notion that, as DOJ attorneys, they were conducting an independent criminal tax investigation unrelated to the grand jury investigation in which they were serving under Rule 6 as attorneys for the grand jury. In my opinion, that is nonsense, and I think I could get a court to agree on that one. The issue in this blog is whether, when not tainted by already serving in a related grand jury investigation, could DOJ have independent criminal tax investigation powers and authority. I also think that too is nonsense, but I am less certain that I could get a court or even anyone to agree.

  5. Thank you for your thorough explication. To a non-lawyer, this system seems like so much nonsense. From a taxpayer perspective, the idea should be to collect the money for the country not to showcase ambitious lawyers like Mr. Downing. If I understand your explanation, the Government has three potential routes to a criminal conviction, with one (and perhaps the others also to a greater or lesser extent?) requiring a new investigation to perfect the civil suit, when the required information is already in the government's hands! Apart from the human resource waste, as a practical observation, is there a substantial risk that the different prosecutor elements (and civil investigators) would trip each other up?

    This is a situation that is crying out for reform! Just to be clear, this criticism is not aimed at you Jack. Your frustration with DOJ is palpable, but at a system that does not serve the public well.

  6. Efficiency is not everything. There are good reasons and policies behind Section 6103 and Rule 6(3). Both perhaps need some slight tweaking, but the policies are good. It is where they fail to apply at all that concerns me -- as in the case of the so-called DOJ Tax criminal tax investigation.


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