How is a Sentence Determined in a Criminal Tax Case?
By Anthony Diosdi
The most frightening part of being a defendant in a criminal tax case is the potential penalties. This article provides a brief overview as to how a court determines a sentence after a defendant is convicted of a federal tax crime (such as tax evasion or filing a false tax return) by either pleading guilty to a charge, or by being found guilty after a trial. This article is based on the Criminal Tax manual published by the Depart of Justice.
In 2005, the United States Supreme Court significantly altered the federal sentencing landscape when it decided United States v. Booker, 543 U.S. 220 (2005). From 1987 until 2005, federal sentencing had been governed by the mandatory application of the United States Sentencing Guidelines or (“Guidelines”). The Guidelines required federal judges to find a number of facts at sentencing, to calculate the appropriate months of imprisonment. In Booker, the Supreme Court held that the mandatory application of the Guidelines violated the Sixth Amendment. The Supreme Court determined that the Guidelines should only be advisory. Post Booker, sentencing judges impose sentences in accordance with 18 U.S.C. Section 3553(a), which describes Congress’s federal sentencing goals and lists factors that sentencing judges must consider.
Both precedent from the Supreme Court and 18 U.S.C. Section 3553(a)(4) requires district courts to consider the applicable Guidelines range in sense. Although the Guidelines are no longer mandatory, a district court must still use the Guidelines to calculate a defendant’s sentencing range and must consider this range when devising a sentence. In calculating the advisory Guidelines range, the sentencing judge must make factual findings using the preponderance of the evidence standard. Although the Guidelines are now advisory, calculating the Guidelines range remains a significant part of federal sentencing.
The Application of the Federal Sentencing Guidelines in a Criminal Tax Case
The Guidelines provide for a sentencing table. The sentencing table contains guidelines that range in months of imprisonment. There is also an offense level (1 through 43) which forms a vertical axis of the sentencing table. The defendant’s criminal history category (1 through IV) forms a horizontal category of the table. The intersection of the offense level and the criminal history category on the sentencing table displays the guidelines range in months of imprisonment.
In any criminal tax case, the concept of “tax loss” is extremely important in determining the length of a sentence. For cases involving income tax evasion and filing false returns or statements, the tax loss is “the total amount of loss that was the objective of the offense (i.e., the loss that would have resulted had the offense been successfully completed).” Section 2T1.1 of the Guidelines describes “presumptions: that the sentencing court should employ when calculating the tax loss in various situations involving certain tax crimes such as tax evasion, filing of false tax returns, and failure to file tax returns. Specifically, these presumptions provide that the tax loss should equal a certain percentage of the unreported gross income, or improperly claimed deductions or exemptions at issue, please all false credits claimed against tax, “unless a more accurate determination of the tax loss can be made.” The commentary to Section 2T1.1 explains that these presumptions are not binding, but rather serve as general formulas:
A court may include state tax losses in the tax loss computation, if the state tax loss constitutes relevant conduct. Generally, the tax loss computation is not confined to the amount the government actually lost in taxes, or the amount of tax money the Internal Revenue Service (“IRS”) actually could recover. Likewise, the tax loss is not reduced by payments of taxes after notification of an investigation. Ultimately, the tax loss is based upon the loss intended by the defendant, regardless of whether the intended loss occurred or was realistic. However, a court “should account for any unclaimed credit, deduction, or exemption that is needed to ensure a reasonable estimate of the tax loss,” but only to the extent that three conditions are met.
First, the credit, deduction, or exemption must be related to the tax offense and have been claimable at the time the tax offense was committed. Second, the credit, deduction, or exemption must be “reasonably and practicably ascertainable.” Third, the defendant must present :information to support the credit, deduction, or exemption sufficiently in advance of sentencing to provide an adequate opportunity to evaluate whether it has sufficient indicia of reliability to support its probable accuracy.” For purposes of applying the sentencing guidelines, as an example, for an offense of tax evasion, the base offense level is 6, and is increased as the tax loss increases. For all criminal tax cases, the base offense level is also increased if the defendant failed either to report or correctly identify the source of income of over $10,000 in any year from criminal activity. The phrase “criminal activity” means “any conduct constituting a criminal offense under federal, state. Local, or foreign law.”
The guidelines provide for a two-level enhancement of the base offense of a criminal tax offense if “the offense involved sophisticated means.”
“Sophisticated means” means especially complex or especially intricate offense conduct pertaining to the execution or concealment of an offense. Conduct such as hiding assets or transactions, or both, through the use of fictitious entities, corporate shells, or offshore financial accounts ordinarily indicates sophisticated means.
Conduct need not involve banking or financial methods in order to constitute sophisticated means. Even if certain acts would not constitute sophisticated means when considered in isolation, such acts may constitute sophisticated means when viewed in the aggregate. The sentencing table also requires a determination of the defendant’s criminal history. This means that a defendant with a record of prior criminal behavior is more culpable than a first time offender and thus may receive a greater sentence.
18 U.S.C. Section 287 prohibits presentation of false, fictitious, or fraudulent claims to the government. Similarly, 18 U.S.C. Section 286 conspiracies to defraud the government by obtaining or aiding to obtain the payment of any false, fictitious or fraudulent claim. In the criminal context, these statutes generally apply to individuals who file income tax returns claiming false or fraudulent refunds of income tax. Section 2B1.1 establishes a base offense of 6 for crimes involving fraud or deceit, Section 2B1.1 provides for an increase in the base offense level corresponding to the amount of loss exceeding $5,000. The loss need only be a “reasonable estimate” and includes the intended loss attributable to the offense or scheme. Defendants who pursue false claims for refund schemes may be responsible at sentencing for the total sum of refunds claimed.
Section 2T1.9 of the Guidelines governs conspiracies to “defraud the United States by impeding, impairing, obstructing and defeating . . . the collection of revenue.” This guideline applies to what is commonly called a “Klien conspiracy,” as described in United States v. Klein, 247 F.2d 908 (2d Cir. 1957). Klein conspiracies are frequently charged against tax protestors, fraudulent tax return preparers, and promoters of tax shelters. If the Guidelines do not provide an offense level greater than 10, the base offense level is 10. When calculating the tax loss attributable to a defendant of a Klien conspiracy, courts typically hold the defendant “responsible for ‘all reasonably foreseeable acts and omissions . . . in furtherance of the jointly undertaken criminal activity.” See United States v. Ladum, 141 F.3d 1346 (9th Cir, 1998). This requires a determination of “the scope of the criminal activity the particular defendant agreed to jointly undertake (i.e., the scope of the specific conduct and objectives embraced by the defendant’s conduct). A court will typically sentence a defendant according to the tax loss which he or she caused, as well as the tax loss which his or her coconspirator caused, if that tax loss was reasonably foreseeable to the defendant. Further, in assessing the amount of tax loss, the district court may make a ‘reasonable estimate’ of the amount of the loss that the defendant intended to inflict, not the actual amount of the government’s loss. See United States v. Kraig, 99 F.3d 1361, 1370-71 (6th Cir. 1996). Whether the conspirators actually completed the offense is irrelevant for purposes of calculating the offense level.
As discussed above, Klein conspiracy often involves fraudulent tax return preparers.
The sentencing guidelines provide for an additional two-level enhancement of the offense level if “the defendant was in the business of preparing or assisting in the preparation of tax returns.” This enhancement applies to defendants “who regularly prepare or assist in the preparation of tax returns for profits.”
Acceptance of Responsibility
The guidelines authorizes the district courts to reduce a defendant’s offense level by two levels “if the defendant clearly demonstrates acceptance of responsibility for his or her offense …” According to Section 3E.1.1(a) of the Guidelines, a defendant demonstrates acceptance of responsibility by:
1) truthfully admitting conduct comprising the offense and truthfully admitting or not falsely denying any relevant conduct;
2) voluntarily terminates criminal conduct and withdraws criminal associations;
3) voluntarily pays restitution prior to the adjudication of guilt;
4) voluntarily surrenders to authorities promptly after committing the offense;
5) voluntarily assists authorities in recovering fruits and instrumentalities of the offense;
6) voluntarily resigns from an office or position held while committing the offense;
7) makes significant post-offense rehabilitation efforts; or
8) timely accepts responsibility.
The most common means by which a defendant qualifies for a reduction in his or her offense level for acceptance of responsibility is by entering a guilty plea and admitting to the elements of the crime to which he or she is pleading. In rare circumstances, a defendant may clearly accept responsibility yet proceed to trial. Such a circumstance occurs when a defendant goes to trial to assert and preserves issues of constitutionality or statutory application unrelated to factual guilt.
Generally, the payment of restitution, either prior to adjudication of guilt or prior to sentencing, can constitute some evidence that a defendant has accepted responsibility for his or her criminal conduct. See United States v. Asher, 59 F.3d 622, 624-25 (7th Cir. 1995). One can envision a case in which a defendant clearly manifests acceptance of responsibility, for example, by pleading guilty, filing amended returns, changing business practices to ensure timely payment of taxes, and agreeing to cooperate with the IRS or enter into a payment plan, but does not have the financial ability to pay restitution immediately. It would not seem that a current inability to pay would necessarily negate the other evidence of acceptance. The courts of appeals have emphasized that district courts should not unfairly discriminate in favor of defendants possessing greater financial resources than others. See United States v. Flowers, 55 F.3d 218, 221-22 (6th Cir. 1995).
5K Departures
Section 5K of the Guidelines provides for departures from the prescribed Guidelines range in limited circumstances. Section 5K provides a non-exhaustive outline of factors that the court may consider in enhancing or reducing a defendant’s sentence. These factors include, but are not limited to:
1) Coercion and duress;
2) Involuntary diminished capacity;
3) Lesser harm avoided;
4) Voluntary disclosure prior to discovery.
When contemplating departure, the sentencing court must first determine the appropriate Guidelines sentence. Then the court must consider whether there are mitigating circumstances present that warrants departure. The defendant must prove by a preponderance of the evidence that he or she is entitled to a downward departure. The departure delineated by Section 5K, the court may depart when the court finds there exists mitigating circumstances of a kind, or to a degree, not adequately taken into consideration by the Sentencing Commission in formulating the guidelines that result in a sentence different than described.
Title 18 U.S.C. Section 3553(e) and 28 U.S.C. Section 994(n) grants a court, upon government motion, limited authority to impose a lower sentence than would otherwise be imposed, including a sentence that is lower than the established by statute as a minimum sentence when the defendant has provided substantial assistance to the government. The Guidelines list certain factors that can never be bases for departure: 1) race, sex, national origin, creed, religion, socioeconomic status; 2) lack of guidance as a youth; 3) drug or alcohol dependence; and 4) economic hardship.
A defendant’s intent to pay eventually and job loss has been sustained as the basis for a downward departure in tax evasion cases. See United States v. Brennick, 134 F.3d 10, 13-15 (1st Cir. 1998); United States v. Olbres, 99 F.3d 28, 34 (1st Cir. 1996). Courts hold that only “extraordinary” family responsibilities warrant downward departure. See United States v. Jones, 158 F.3d 492, 499 (10th Cir. 1998). However, “family ties and responsibilities are not ordinarily relevant in determining whether a departure may be warranted. To similar effect, defendants’ mental and physical health problems rarely rise to the level of “extraordinary physical impairment” necessary for downward departure.
Conclusion
The Federal Guidelines are a set of non-binding rules established by the United States federal court system in 1987 to provide a uniform policy for criminal defendants convicted in the federal court system. The guidelines provide for a very precise calibration of sentences depending on a number of factors that relate to the subjective guilt of the defendant and the harm caused by their actions. Although the Guidelines are not mandatory, they provide a guideline in regards to the potential sentence a defendant accused of a federal tax crime or crimes could ultimately face. Counsel representing a defendant accused of a federal tax crime should carefully analyze the Federal Guidelines and determine how these non-binding rules apply to his or her client’s case.
Anthony Diosdi is one of several tax attorneys and international tax attorneys at Diosdi Ching & Liu, LLP. Anthony Diosdi focuses a part of his practice on criminal tax enforcement, broad-based civil tax compliance and white collar matters generally. He also advises clients on the IRS voluntary disclosure program, with particular focus on disclosure related to offshore banking accounts.
Anthony Diosdi is a frequent speaker at international tax seminars. Anthony Diosdi is admitted to the California and Florida bars.
Diosdi Ching & Liu, LLP has offices in San Francisco, California, Pleasanton, California and Fort Lauderdale, Florida. Anthony Diosdi advises throughout the United States. Anthony Diosdi may be reached at (415) 318-3990 or by email: adiosdi@sftaxcounsel.com.
This article is not legal or tax advice. If you are in need of legal or tax advice, you should immediately consult a licensed attorney.
Written By Anthony Diosdi
Anthony Diosdi focuses his practice on international inbound and outbound tax planning for high net worth individuals, multinational companies, and a number of Fortune 500 companies.