The Role of the DOJ Tax Division in Criminal Tax Enforcement (9/18/12)

Tax Notes has published an article about the role of the Tax Division in tax litigation, including criminal litigation.  Shamik Trivedi, For DOJ Tax Division, Consistency and Deterrence Are Key, 136 Tax Notes 1231 (Sept. 10, 2012), here.  Tax Analysts has given permission to publish this article in this blog.  Key highlights related to criminal enforcement (most of the article) are:

In news analysis, Shamik Trivedi examines the Justice Department Tax Division's sometimes opaque enforcement process. 

The IRS Criminal Investigation division refers potential tax crimes to the Justice Department Tax Division, which decides whether to authorize a grand jury investigation or prosecution. The investigation and prosecution can be conducted either by the Tax Division itself, or with or through one of the 95 U.S. attorney's offices. 

As a result, the relationship the Tax Division has with each of those offices is critical to the consistent enforcement of U.S. tax laws. A U.S. attorney typically can bring any number of prosecutions in any number of areas. But for tax charges, no matter the size or scope, all roads lead to the Tax Division for authorization. 

Title 26 of the U.S. code, which affects every U.S. person, must be applied consistently, and the Tax Division has the last word on whether to authorize tax charges against a defendant. The Tax Division is responsible for all civil and criminal tax trials outside the Tax Court, as well as appellate litigation involving the Internal Revenue Code. How that is accomplished, and how the Tax Division executes the priorities it and the IRS have designated, can be baffling to practitioners.

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With Consistency Comes Deterrence 

Unlike other violations of the U.S. code, those under Title 26 can affect any U.S. person in any given year. Tax crimes are "potential felonies that confront every American each year," said Mark E. Matthews, a former deputy assistant attorney general for the DOJ Tax Division and a former IRS deputy commissioner. 

As a result, uniformity and consistency in enforcing those laws are critical, said Matthews, now in private practice with Caplin & Drysdale. Both federal law and the U.S. attorney's manual mandate that indictments in tax cases be authorized by the Tax Division, no matter which office is bringing the case. "That's a key protection," said Scott Schumacher, a former Tax Division attorney and now a professor at the University of Washington School of Law. 

Other, non-IRS government agents investigating violations of the law can go directly to the assistant U.S. attorney to help develop and prosecute a case, said Eileen J. O'Connor, former assistant attorney general in the Tax Division, now with Pillsbury Winthrop Shaw Pittman LLP. "But when a violation of the Internal Revenue Code is involved, the Tax Division must authorize" any grand jury investigation or prosecution, she said. 

The task of maintaining uniform prosecution across the country falls on several units within the Tax Division, including the regional criminal enforcement section chiefs, said Hochman, now in private practice with Bingham McCutchen LLP. Those chiefs lead the Northern, Southern, and Western sections and have a wealth of experience, he said. "You rely on the fact that these folks have decades of experience and have been around the block many, many times." That type of experience not only allows the government to pursue various types of alleged tax crimes uniformly, but it also helps it avoid overreaching on a case -- a benefit to all parties, Hochman said, adding, "The mere bringing of an indictment exacts great damage to your reputation, even if you prevail." 

Step by Step 

Maintaining a consistent approach to prosecutions requires coordination, planning, and oversight. From initial investigation to indictment, a potential defendant's case is reviewed by several organizations. In a typical administrative investigation case, a revenue agent may refer the case to CI after encountering what appears to be an indication of fraud, and an IRS special agent then investigates. CI tax counsel may assist the division in determining whether a prima facie case exists. That investigation goes to the CI special agent in charge, who conducts her own review. 

If the special agent in charge deems the case worthy of prosecution, the file is sent to the Tax Division with a request that it authorize prosecution. A Tax Division prosecutor reviews the file, with several possible outcomes, said O'Connor. 

In the clearest and most well-developed cases, the reviewing Justice attorney will recommend prosecution. If the attorney believes more evidence is needed and can be obtained by the IRS's investigative authority, the Tax Division refers the case back to the IRS for further administrative investigation. If more evidence is needed that cannot be obtained by the IRS, the Tax Division authorizes a grand jury investigation and refers the matter to the appropriate U.S. attorney's office for that purpose. 

The reviewing attorney's recommendations will include not only whether to prosecute or further investigate, but also suggestions about legal theories and trial strategy. Those will be reviewed by an assistant chief, the chief of the regional criminal enforcement section, the deputy assistant attorney general, and, in some cases, the assistant attorney general. 

At each step, conferences are held between investigators and prosecutors of the agencies. Defense counsel will have the opportunity to meet with the Tax Division to try to persuade it not to authorize prosecution. Defense counsel sends an "if and when" letter -- that is, if and when the Tax Division receives a referral on the taxpayer -- to request a pre-decision conference as soon as they learn that the client might be under criminal tax investigation. 

When the Tax Division approves a grand jury investigation for a tax crime, the CI special agent works as an investigator for the assistant U.S. attorney. At the end of the investigation, the special agent writes a report summarizing the result and makes a recommendation for prosecution that must be approved by the Tax Division before a plea can be entered or an indictment can be sought by the U.S. attorney's office. 

Nontax cases may have criminal tax aspects. In those situations, the U.S. attorney's office will invite CI's district special agent in charge to participate in the investigation, said Sandra Brown, assistant U.S. attorney and tax division chief in the U.S. attorney's office for the Central District of California. 

Former and current Tax Division attorneys and officials said that even with all the moving parts between the Tax Division, the IRS, and the U.S. attorney's offices, the relationship between the organizations is stable. "It's remarkable the efficiency -- and this is a government agency -- in the way [the Tax Division] handles this stuff. A large part of it is due to the lack of friction within the agency," said Edward M. Robbins Jr., Brown's predecessor, who is now with Hochman, Salkin, Rettig, Toscher & Perez PC in Beverly Hills, Calif. 

Keneally praised the DOJ's relationship with CI, saying, "It's a very close relationship. We're partners in law enforcement. Cases come to us primarily as referrals from CI, so for the most part, we're addressing their enforcement priorities." 

Relationship With U.S. Attorney's Offices 

Only a few of the 95 U.S. attorney's offices have assistant U.S. attorneys who regularly handle their own criminal tax prosecutions. 

Assistant U.S. attorneys in the largest and busiest U.S. attorney's offices -- the Southern District of New York, the Northern District of Illinois, the Southern districts of Florida and Texas, the Eastern District of Virginia, and the Central and Northern districts of California -- have experience prosecuting tax cases. The Southern District of New York has long been relatively independent in developing and bringing its own prosecutions -- although subject to the approval of the Tax Division. 

Because many smaller jurisdictions lack the resources or expertise to prosecute tax cases from beginning to end, the Tax Division sends attorneys out to conduct investigations, present evidence to a grand jury, seek an indictment, and prosecute a case. The assistant U.S. attorney acts as a liaison, introducing the Tax Division attorney to the judge and assisting with local rules, according to Jack Townsend, a former Tax Division attorney who is now in private practice with Townsend & Jones LLP in Texas. Beyond that, the Tax Division will handle the case almost exclusively, he said. 

The larger U.S. attorney's offices rarely request advice or assistance from the Tax Division because they have experienced criminal-tax assistant U.S. attorneys, Townsend said. But DOJ attorneys are likely to materially participate in high-profile cases such as the investigations of alleged tax shelter promotions by KPMG LLP and prosecutions of taxpayers with unreported offshore accounts. 

Justice Department involvement in high-profile cases furthers the Tax Division's goal of consistency across both decisions to prosecute and in how prosecution is conducted. The prosecution of Swiss bank UBS was successful because of coordination between the Tax Division and the local U.S. attorney's offices, said Jeffrey A. Neiman.