Is the Sentencing Guidelines’ Zero-Point Offender Provision a Get Out of Jail Free Card for First-Time Criminal Tax Offenders?

Under Amendment 821 to the Federal Sentencing Guidelines, the United States Sentencing Commissioner added two new Guidelines provisions to the Federal Sentencing Guidelines.

The first new provision created by the Commission resulted in an “Adjustment for Certain Zero-Point Offenders” under Guideline Section 4C1.1. Under Guideline Section 4C1.1, if a defendant satisfies a number of conditions, he or she is entitled to a two-level reduction in his or her total base level. Second, the Commission added a new application note to 10(A) to Guidelines Section 5C1.1 which provides “If the defendant received an adjustment under Section 4C1.1 and the defendant’s applicable guideline range is in Zone A or B of the Sentencing Table, a sentence other than a sentence if imprisonment is generally appropriate.”

What does all this mean for the first time criminal tax offender facing a sentencing court? Before answering this question, it is important to understand how the Federal Sentencing Guidelines operate. We will begin this article by discussing how the Federal Sentencing Guidelines operate.

Introduction to the Federal Sentencing Guidelines

If an individual pleads guilty to a federal tax crime or is found guilty of a federal tax crime, the sentencing court will likely consult the Federal Sentencing Guidelines to determine the length (if any) of the prison sentence. The Federal Sentencing Guidelines are a set of non-binding rules established by the United States federal court system to provide a uniform sentencing policy for criminal defendants convicted of a federal crime. The Federal Sentencing Guidelines take into account both the seriousness of the offense and the offender’s criminal history. The Federal Sentencing Guidelines provide 43 levels of offense seriousness. The more serious the crime, the greater the offense level.

Each type of crime is assigned a base offense level, which is the starting point for determining the seriousness of the offense. More serious types of crimes have a higher base offense level. In addition to base offense levels, each offense type typically carries with it a number of specific offense characteristics. For example, fraud has a base level of 7. However, if a fraud involved a $6,000 loss, there would be a 2-level increase to the base offense level, bringing the level up to 9. If a fraud involved a $50,000 loss, there would be a 6-level increase, bringing the total up to 13. Adjustments are factors that can apply to any offense. Like specific offense characteristics, they adjust or decrease the offense level. Categories of adjustments include: victim-related adjustments, the offender’s role in the offense, and obstruction of justice. When there are multiple counts of conviction, the Federal Sentencing Guidelines provide instructions on how to achieve a “combined offense level.” In these cases, the most serious offense is used as a starting point. The other counts determine whether and how much to increase the offense level.

The final step is to determine an offender’s offense if there is acceptance of responsibility. The Federal Sentencing Guidelines authorizes the 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 Federal Sentencing 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 criminal tax 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 Internal Revenue Service (“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).

A criminal tax defendant can also accept responsibility by cooperating with an IRS auditor during the examination of his or her tax return or assisting an IRS examiner determine his or her correct tax liability during an examination.

The Federal Sentencing Guidelines assign each offender to one of six criminal categories based upon the extent of an offender’s past misconduct. Criminal History Category I is the least serious category and includes many first-time offenders. Criminal History VI is the most serious category and includes offenders with serious criminal records.

The final offense level is determined by taking the base offense level and then adding or subtracting from it any specific offense characteristics and adjustments that apply.

There are four sentencing zones: A, B, C, and D. Zone A consists of sentencing ranges of 0-6 months. Zone B consists of sentencing ranges above Zone A but with a maximum penalty of no more than 15 months. Zone C consists of sentencing ranges above Zone B but whose maximum penalty is 18 months or less. Zone D consists of sentencing ranges above C. Traditionally, offenders whose total-offense level was between 1 and 8 fell within Zone A of the Federal Sentencing Guidelines and offenders whose total-offense level was between 9 and 11 fell within Zone B.

The Application of the Federal Sentencing Guidelines in a Criminal Tax Case

As indicated above, the Federal Sentencing 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 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 Federal Sentencing 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 co-conspirator 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.”

Sentences Outside of the Guidelines Range

The mandatory nature of the Federal Sentencing Guidelines became advisory in United States v. Booker, 543 U.S. 220 (2005). Since Booker, while the sentencing court is still required to consider the applicable Guidelines range, it must consider other factors enumerated in 18 U.S.C. Section 3553(a)(2). In United States v. Crosby, 397 F.3d 103 (2d Cir, 2005), the Second Circuit reviewed Booker and explained how courts should now approach sentencing and arrive upon a fair and just sentence. To determine a sentence, a court must first calculate the defendant’s guidelines and consider them. Next, the sentencing court must consider whether departures are appropriate. Third, the court must decide, after considering the Guidelines and all of the 18 U.S.C. Section 3553(a) factors, whether to impose a Guideline sentence (including a sentence that results from permissible departures), or a non-guideline sentence.

Zero-Point Offender Adjustment in Criminal Tax Cases

On April 27, 2023, the United States Sentencing Commission sent a series of amendments to be implemented on November, 2023, and among those is a two level downward adjustment for certain Zero-Point Offenders, those with no criminal history points. An offender must meet an additional 9 criteria, including that the offense does not involve terrorism, a hate or sex offense, or have resulted in serious bodily injury or death, nor has the defendant received a role in the offense adjustment while engaging in a continuing enterprise.

In order for the criminal tax defendant to apply, the defendant must meet all of the criteria:

1. the defendant did not receive any criminal points from Chapter Four, Part A (Part A of Chapter 4 of the Federal Sentencing Guidelines is titled “Criminal History.” It discusses how a defendant’s criminal history is relevant to the purposes of sentencing. The Federal Sentencing Guidelines states that defendants with a history of criminal behavior are more culpable than first-time offenders);
2. the defendant did not use violence or credible threats of violence or possess a firearm or other dangerous weapon (or induce another participant to do so, in connection with the offense);
3. the offense did not result in death or serious bodily injury; (4) the defendant’s acts or omissions do not result in substantial financial hardship;
4. the defendant was not an organizer, leader, manager or supervisor of others in the offense, as determined under Section 3b1.1 (Aggravating Rule), and was not engaged in a continuing criminal enterprise, as defined in 21 U.S.C. Section 848; and (6) the defendant was not determined to be a repeat and dangerous sex offender against minors under Section 4b1.5.
5. the defendant did not personally cause substantial financial hardship;
6. the defendant did not possess, receive, transport, transfer, sell, or otherwise dispose of a firearm or other dangerous weapons;
7. the instant offense does not involve individual rights;
8. the defendant did not receive an adjustment under Section 3A1.1 for a hate crime;
9. the defendant did not receive an adjustment under Section 381.1 for an aggravating role in a continued criminal enterprise defined in 21 U.S.C. Section 848.

Most first time criminal tax defendants will invariably qualify for the two point reduction under Section 4C1.1 because a tax offense typically does not involve the elements in the above discussed criteria. We will now turn to how note 10(a) to Guideline Section 5C1.1 may impact the sentencing of a first time criminal tax defendant. Note 10(a) to Guideline Section 5C1.1 provides “If the defendant received an adjustment under Section 4C1.1 (adjustment for Certain Zero-Point Offenders) and the defendant’s applicable Guidelines range is in Zone A or B of the Sentencing Table, a sentence other than a sentence of imprisonment..is generally appropriate.”

Section 5C1.1 is a potential gain-changer for first-time criminal tax defendants whose total-offense level was between 1 and 8 and falls within “Zone A” of the Guidelines or whose total-offense level was between 9 and 11 and falls within “Zone B” of the Guidelines. The two point reduction reduction under Section 4C1.1 may also assist a criminal tax dependant whose offense level was 13 and falls within “Zone C.” This is because the two point reduction of Section 4C1.1 would reduce the total-offense level from 13 to 11 and the defendant would fall within “Zone B.” For certain criminal tax defendants, the Zero-Point Offender provision offers a welcome opportunity to avoid a prison sentence. With that said, in criminal tax cases, tax loss amounts are often the driving factor in sentencing under the Guidelines. Criminal tax cases often involve tax loss to the Government of hundreds of thousands or even millions of dollars. In these cases, the total-offense level may fall well above 13. Thus, the Zero-Point Offender provision (on its own) may not be an effective tool to keep tax offenders with a large tax loss from receiving a prison sentence.

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 & 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.