Tuesday, April 29, 2014

U.S. Congressman Indicted for Tax Related Crimes (4/29/14)

The federal indictment of U.S. Representative Michael Grimm -- formerly a Marine and an FBI agent -- has been in the news.  See the press release from USAO EDNY, here, and the indictment here.  According to the press release, the charges are:
A 20-count indictment was unsealed this morning in federal court in Brooklyn charging Michael Grimm with five counts of mail fraud, five counts of wire fraud, three counts of aiding and assisting in the preparation of false federal tax returns, one count of conspiring to defraud the United States, one count of impeding the Internal Revenue Service, one count of health care fraud, one count of engaging in a pattern or practice of hiring and continuing to employ unauthorized aliens, two counts of perjury and one count of obstructing an official proceeding.
As explained in the press release, the charges center around Grimm's alleged conduct that had a purpose of evading federal and state taxes related to employees, but also touched other crimes. Tax crimes enthusiasts will know that run of the mill tax crimes also potentially involve mail fraud and wire fraud, but DOJ Tax typically does not charge mail fraud and wire fraud except in the most egregious of cases.  See Tax Division Directive 128, here.  This appears to be an egregious case, at least as alleged in the indictment and in the press release.

The proliferation of charges from a unified pattern of conduct should remind readers that (1) the prosecutors have a grab bag of charges in the IRC and Title 18 and other Titles that can be marshaled in an indictment and (2) a sentencing truism that proliferating charges from a pattern of conduct is not likely to affect the sentence beyond what could have been achieved with a fewer number of charges.  In the latter regard, the press release further states:
If convicted, Grimm faces a term of imprisonment of up to 20 years for each mail and wire fraud charge and for the obstruction charge, up to 10 years of imprisonment for the health care fraud charge, and up to five years of imprisonment for the charge of conspiring to defraud the United States and for each perjury charge. Grimm further faces a term of imprisonment of up to three years for each charge of aiding and assisting in the preparation of a false and fraudulent tax return and for the charge of obstructing and impeding the due administration of the Internal Revenue Laws. Finally, Grimm faces up to six months of imprisonment for engaging in a pattern or practice of hiring and continuing to employ unauthorized aliens, as well as forfeiture, restitution, and fines.
It is hard to imagine that, even if convicted of all counts, the sentence will exceed 10 years -- certainly won't exceed 15 years.

Obviously, cherishing the opportunity for a press sound bit, it is reported that the US Attorney said that Grimm "never met a tax that he did not lie to evade."

I thought it might be helpful to remind readers of the DOJ policies regarding charging mail fraud and wire fraud in tax settings.  The following is from my Federal Tax Crimes book:
Overlap with More Specific Criminal Provisions. 
We have already seen that an act criminalized specifically by a particular statute may often violate other more general or even more specific statutes.  The question this raises is whether the more particular criminal sanction should be applied exclusively or whether it is prosecutor’s option or whether the prosecutor could even charge two or more crimes.  We will consider facets of this question below when discussing the lesser included offense concept.   
In the specific mail fraud context, I hope you readily see that the crimes covered by § 7201 and § 7206(1) (to mention just the more prominent tax crimes) could also involve mail fraud or wire fraud, since virtually all tax returns are mailed to the IRS or filed electronically and usually there is some other mail or wire nexus to the implementation of the crime.  Is mail or wire fraud therefore another count that the Government can substitute for charges of tax evasion or tax perjury or some other tax specific crime or, worse still, can it pile those charges on?  To illustrate, the taxpayer files a fraudulent return by mail for year 1.  The Government can charge either evasion (§ 7201) or mail fraud, both have roughly the same elements for conviction, have the same sentence (5 years) and should produce the same sentence.  But, in this simple illustration, in the real world, characterizing the same conduct as mail fraud rather than tax fraud can ramp up the ante because mail fraud, unlike tax fraud, is a predicate act for money laundering or RICO, both of which carry significantly greater sentences than 5 years for tax fraud.  The question here is whether, in a simple tax evasion case whereby the means attempted was a fraudulent return filed by mail, should mail fraud be a choice that the prosecutor can make and, if so, what are the guidelines that the prosecutor should or must consider in making the charging choice?  Although this is a simplified example, the broader issue is presented in a number of more complex cases; the issue is whether, given the fact that Congress has designated a tax crimes path and penalties, the prosecutor can use the ubiquitous other tools – in this case, mail fraud – to punish what is, at core, a tax crime?   
DOJ Tax has policies to deal with this overlap.  Previously, DOJ Tax had a policy to give primacy to the imperatives of targeted crimes for the tax system rather than more general crimes, and thus generally disapproved the charging of more general crimes when the tax crimes seemed more appropriate.  DOJ Tax, however, recently superseded this policy directive with a new directive, No. 128.  That directive provides (footnotes omitted). 
Tax Division approval is required for any criminal charge if the conduct at issue arises under the internal revenue laws, regardless of the criminal statute(s) used to charge the defendant.  Tax Division authorization is required before charging mail fraud, wire fraud or bank fraud alone or as the predicate to a RICO or money laundering charge for any conduct arising under the internal revenue laws, including any charge based on the submission of a document or information to the IRS.  Tax Division approval also is required for any charge based on a state lax violation if the case involves parallel federal tax violations. 
The Tax Division may approve mail fraud, wire fraud or bank fraud charges in tax-related cases involving schemes to defraud the government or other persons if there was a large fraud loss or a substantial pattern of conduct and there is a significant benefit to bringing the charges instead of or in addition to Title 26 violations. See generally United States Attorneys' Manual (U.S.A.M.) $9-43.100. Absent unusual circumstances, however, the Tax Division will not approve mail or wire fraud charges in cases involving only one person's tax liability, or when all submissions to the IRS were truthful.  
Fraud charges should be considered if there is a significant benefit at the charging stage (e.g,, supporting forfeiture of the proceeds of a fraud scheme; allowing the government to describe the entire scheme in the indictment); at trial (e.g., ensuring that the court will admit relevant evidence of the scheme; permitting flexibility in choosing witnesses); or at sentencing (e.g., ensuring that the court can order full restitution). See id § 9-27 320(B)(3) (“If the evidence is available, it is proper to consider the tactical advantages of bringing certain charges.”).  
For example, mail fraud (18 U.S.C. § 1341) or wire fraud (18 U.S.C. § 1343) charges may be appropriate if the target filed multiple fraudulent returns seeking tax refunds using fictitious  names, or using the names of real taxpayers without their knowledge. Fraud charges also may be considered if the target promoted a fraudulent tax scheme. 
Bank fraud charges (18 U.S.C. $1344) can be appropriate in the case of a tax  fraud scheme that victimized a financial institution. Example: the defendant filed false claims for tax refund and induced a financial institution to approve refund anticipation loans on the basis of the fraudulent information submitted to the IRS. 
Racketeering and Money Laundering Charges Based on Tax Offenses
The Tax Division will not authorize the use of mail, wire or bank fraud charges to convert routine tax prosecutions into RICO or money laundering cases. The Tax Division will authorize prosecution of tax-related RICO and money laundering offenses, however, when unusual circumstances warrant it. 
A United States Attorney who wishes to charge a RICO violation (18 U.S.C. § 1962) in any criminal matter arising under the internal revenue laws,  including a predicate act based on a state tax violation, in the case of a parallel federal tax violation- must obtain the authorization of the Tax Division and the Criminal Division's Organized Crime and Racketeering Section. U.S.A.M. 9-1 10.101. 
A United States Attorney who wishes to bring a money laundering charge (18 U.S.C. § 1956) based on conduct arising under the internal revenue laws must obtain the authorization of the Tax Division and, if necessary, the Criminal Division's Asset Forfeiture and Money Laundering Section. U.S.A.M. § 9-105.300. 
[End of Directive] 
Practitioners have expressed concern that this new directive signals more aggressive use of the mail and wire fraud statutes for tax crimes such as tax crimes.  Among the concerns are: 
The practical effect of such additional charges could be significant in cases where the tax involved is very, very large (so that stacking is needed to reach the sentence that would be imposed by the Sentencing Guidelines).   
An even more dramatic effect on sentencing is achieved if the mail or wire fraud is used as a linchpin for a money laundering charge carrying a much longer sentence that could otherwise not be imposed if only one or more tax crimes were charged.   
I discuss money laundering and sentencing below, so that you can better assess this concern.  At this point, simply keep open the possibility that the directive may make these concerns legitimate concerns. 

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