Sam Brotman, JD, LLM, MBA December 12, 2020 38 min read

How Are Tax Crimes Punished?

This Chapter will discuss the final phase in the criminal tax case- sentencing. It will explain what you can expect after a guilty plea or a finding of guilt by a jury. It will also discuss how and why a sentence is chosen, and what some of the common punishments are for  a tax crime.

I. Sentencing Procedure- What Happens After I Plea or Am Found Guilty?

Generally, after the defendant pleads guilty or is found guilty, a probation officer will ask the defendant questions about the offense, the defendant’s criminal and personal history, financial situation, and other questions relevant to sentencing. This is called the presentence interview. Fed. R. Crim P. 32(c); 18 U.S.C. § 3552. Most districts agree that the defendant still has the right to counsel at the presentence interview, as it is a critical stage of the process.  United States v. Rogers, 921 F.2d 975, 980 (10th Cir.). The Defendant also has the right to remain silent at the interview, however, cooperation will probably lead to better result at this stage as the “acceptance of responsibility” is one factor to be considered at sentencing. See USSG §3E1.

After the probation officer completes the interview as well as their own investigation into these matters, they will prepare a report called the presentence report, which will be reviewed and used by the judge to ultimately determine the proper sentence.  Fed. R. Crim P. 32(d); 18 U.S.C. § 3552. The presentence report includes the results of the investigation as well as a calculation of the defendants sentencing range under the federal sentencing guidelines. See id. The defendant will be given a copy of this presentence report at least 35 days before the sentencing hearing, and will then have a chance to object to anything within the report that they disagree with. SeeFed R. Crim. P (d)-(f).

After the presentence investigation and report are complete, the defendant will be called for another court proceeding, called the sentencing hearing. The sentencing hearing is where the defendant’s final sentence will be pronounced. Both the Government and the defendant’s counsel will have an opportunity to make arguments and provide any input they may have on the sentence. Fed R. Crim. P (i). Depending on the facts of the case, any victims involved in the offense may have the opportunity to address the court and provide their input on the sentence at this time. See id.  Unlike trial, any sufficiently reliable evidence can be introduced at the sentencing hearing and the court may consider all factors in determining the appropriate sentence.See id. 

After hearing from the parties, the judge will pronounce the sentence and advise the defendant of his or her right to appeal the sentence. A defendant will have the right to appellate counsel, even if they can’t afford it. The judge will then  fill out a written report memorializing the orally pronounced sentence for public record.

II. How Is My Sentence Determined? - The Federal Sentencing Guidelines

Why Are the Sentencing Guidelines Important?

When determining a sentence, one of the major factors is the defendants sentencing range, which is determined using a very detailed guidebook called the United States Sentencing Guidelines. In regard to the major tax crimes, the United States Sentencing Guidelines were enacted as a remedy to what Congress determined was too lenient and disproportionate sentencing. Before the guidelines, around half of taxpayers convicted of tax evasion were sentenced to a term of  probation without any prison time, while the other half received prison sentences of about a year. USSG §2T1 (Introduction Commentary.) Until 2005, the application of the United States Sentencing Guidelines was mandatory. However, after a Supreme Court case held that this mandatory application violated the sixth amendment rights of defendants, the guidelines became “advisory”.  United States v. Booker, 543 U.S. 220 (2005). 

While judges now have greater discretion in sentencing and do not technically have to apply the guidelines anymore, they are still required by law to consider certain goals and factors in deciding a sentence.  One of these factors to be considered is the sentencing range calculated by using United States Sentencing Guidelines. Gall v. United States, 552 U.S. 38, 49 (2007). The sentencing range gives a minimum and maximum recommended sentence based on a number of different case- specific factors. This range helps to narrow down the broad maximum and mandatory minimum range allowed by statute. For example, a defendant convicted of tax evasion can serve up to five years in prison. 26 U.S.C. § 7201. Based on the facts of the case, the guidelines will provide the judge with a reasonable sentence range that is somewhere within that five years.

If the judge decides not to follow the guidelines they have to explain what facts caused the increased or decreased sentence. Rita v. United States, 127 S.Ct. 2456 (2007). Another reason judges will tend to follow the guidelines  is that if a sentence is imposed through a proper application of the federal sentencing guidelines, the court of appeals may presume the sentence is reasonable. Gall v. United States, 552 U.S. 38, 49 (2007).

How do the Sentencing Guidelines Work?

The federal sentencing guidelines help calculate the defendant’s sentencing range using a numeric system based on the seriousness of the offense and the defendant’s criminal history.

There are 43 total levels representing the seriousness of the offense.  See United States Sentencing Commision, Overview of the Federal Sentencing Guidelines, The more serious the crime, the higher the base offense level will be. The base offense level can be lower or higher depending on specific characteristics of the offense, such as the use of a weapon during a robbery or amount of money involved in a fraudulent scheme. There are also offense level adjustments which can be applied to any crime. Some examples of these adjustments include the role the defendant played in the crime, victim involvement, and the obstruction of justice. The offense level may also be reduced for the defendant’s acceptance of responsibility for the crime. 

The defendant’s criminal history is taken into account because the policy behind the sentencing guidelines is that repeat offenders should be given a harsher sentence. Points are awarded for the number and severity of a defendant’s prior convictions and added together to obtain a category. There are six categories for criminal history represented by roman numerals. Category I has the lowest amount of points for criminal history and Category VI has the highest.

The final offense level range is determined using a chart with the criminal history categories horizontally on the top and the 43 offense levels vertically on the side. The sentencing range that should be imposed is where the offense level and categories intersect. There are also four zones lettered A through D on the chart, which represent non-prison sentences such as probation and at home confinement.

As the guidelines are “advisory”, the presiding judge may sentence the defendant above or below the sentencing range provided by the sentencing guidelines. If the judge does choose to depart from the guidelines, they must explain the reasons for this decision in writing. Rita v. United States, 127 S.Ct. 2456 (2007). 

What are the Criminal Tax Sentencing Guidelines?

The guideline section which corresponds with tax crimes is Chapter 2, section T. This section provides the base level and specific offense characteristics for each of the tax crimes.

For tax crimes, the main consideration in determining the offense level is the amount of tax loss to the government, which the federal guidelines provide some input on how to compute. For crimes of tax evasion and fraud or false statement, tax loss is defined as “the total amount of loss that was the object of the offense (i.e., the loss that would have resulted had the offense been successfully completed).”USSG § 2T1.1(c)(1). For failure to file or pay cases, the tax loss is what the defendant didn’t pay from what they owed. The Government has the burden of proving the amount of tax loss initially. United States v. Spencer, 178 F.3d 1365, 1368 (10th Cir. 1999). However, the defendant may agree to what the tax loss is as part of a plea. In this case, the defendant will likely be held to the agreed tax loss. If the parties don’t come to an agreement regarding the amount of tax loss, the court has to hold a hearing where evidence is presented to determine the disputed issues. United States v. Marshall, 92 F.3d 758, 760 (8th Cir. 1996). However,  if the court that sentences the defendant presided over the trial and can determine these facts through the trial record, a hearing does not need to take place.  See id.

If there is no agreed tax loss, calculating the exact amount is a complex procedure.If the tax loss can’t be reasonably calculated, it is presumed to be 28% of the gross income plus 100% of any false credits claimed for tax crimes involving underreporting. USSG § 2T1.1(c)(1).  In calculating the tax loss, the court can take into account amounts outside of what the amount the government actually lost or the IRS could have collected. These amounts include state taxes or relevant or uncharged conduct of the defendant, such as unpaid taxes for years prior. United States v. Tandon, 111 F.3d 482, 490 (6th Cir. 1997). If there are penalties or interest related to the unpaid taxes, these are generally not included in the tax loss calculation, unless the crime charged is for evasion of payment or failure to pay. See USSG §2T1.1(c)(1).  Once the tax loss has been calculated, the base offense level can be determined using a chart within the federal sentencing guidelines manual called the tax table. USSG § 2T41.1 Base offense levels for tax crimes range from a level 6 to a level 36.

The base level of a tax crime can be increased or decreased due to the specific facts of each case. These base level adjustments are called specific offense characteristics. For example, there is a base level increase if the defendant failed to report income from criminal activity exceeding $10,000.00. USSG § 2T1.1 Another increase will be made if the defendant committed the crime using more complex or elaborate conduct or planning than the average tax evasion case. USSG § 2T1.1 For example, if the defendant evaded their taxes by using a corporate shell or money laundering scheme, this could qualify for a base level enhancement.  There is also a significant increase for the planned or threatened use of violence in committing the offense, and for the intent to convince others to violate tax laws. USSG § 2T1.9

If the defendant can prove that he or she played  a minor role in the offense, the level can be reduced. USSG §3B1.2. See United States v. Searan, 259 F.3d 434, 447-48 (6th Cir. 2001). Another common reduction that can be granted is the defendant demonstrates that they have accepted responsibility for the offense. USSG §3E1.1(a). Generally, this is only available to defendants who have taken a plea or admitted to elements of the offense.  USSG §3E1.1(a), comment. (n.2) (emphasis added). In a tax case, the early payment of the tax owed, voluntary disclosure to the IRS, or cooperation in an investigation could help demonstrate an acceptance of responsibility.

III. Restitution, Fines and Forfeiture - What is the difference between forfeiture and restitution?

For a taxpayer facing a criminal tax sentence, one important question is: how much will I owe? There are three different types of monetary punishments that may be ordered by the court in a criminal tax case: (1) restitution (2) forfeiture and (3) fines.  The purpose of restitution is to compensate a victim, while the purpose of forfeiture and fines is to punish the defendant. However, since the Government is the victim in a criminal tax case, it is possible that a taxpayer can be hit with all three.  United States v. Sanjar

What is Restitution?

Restitution is a legal way for victims to be paid back for a crime. In criminal tax cases, the victim is the United States Government, but they can still be owed compensation just like a civilian victim. 

Restitution can only be ordered by a judge when a law or rule allows for it. There are three major sections that allow for restitution in tax related offenses. The Victim and Witness Protection Act (VWPA), which was enacted by Congress in 1982 allowed for restitution to be ordered in criminal cases that fall under Title 18 of the U.S. Code, or in any criminal case where a defendant agrees to restitution in a plea agreement. Pub. L. No. 97-291, 96 Stat. 1248; See 18 U.S.C. § 3663. Since most tax crimes fall under Title 26 of the U.S. Code, there is no express authorization in those cases for the judge to order restitution without an agreement by the defendant. The Mandatory Victim Restitution Act (MVRA) which was enacted 14 years later, made restitution for Title 18 crimes mandatory, and included charges related to tax crimes such as conspiracy to defraud the United States and false or fraudulent claims. See 18 U.S.C. § 3663A.  Pub. L. No. 104-132, § 204(a), 110 Stat. 1227.  Finally, the Sentencing Guidelines state that restitution may be ordered as a condition of probation or supervised release. USSG § 5E1.1.  The power to order a defendant to pay restitution as one of these conditions come from 18 U.S.C. § 3563(b) (as a condition of probation) and 18. U.S.C. § 3583(d) (as a condition of supervised release).

All this means that there are three ways restitution can be ordered in a criminal case: (1) the tax crime falls under Title 18 of the U.S. Code; (2) the defendant agrees to restitution as part of a plea agreement; (3) or the court orders restitution as a condition of probation or supervised release.

Under the sentencing guidelines, restitution should be ordered when a defendant has been found guilty of a tax crime and the government suffered a loss. See USSG § 5E1.1(a)(2). However, restitution does not need to be ordered if there are too many injured parties to determine restitution or the issues are so complex and drag out the sentencing process so much that determining restitution is more of a burden than a benefit. § 5E1.1(b)(2).  If the judge decides not to order restitution, he or she needs to explain why. See 18 U.S.C. §§ 3663 and 3664.

How is the Amount of Restitution Calculated?

How much restitution you have to pay can be a complicated equation, but essentially it boils down to the money that was actually owed to the government that wasn’t paid. See United States v. Chalupnik, 514 F.3d 748, 754 (8th Cir. 2008); United States v. Galloway, 509 F.3d 1246, 1253 (10th Cir. 2007). Earlier we discussed how the sentencing guidelines for tax crimes rely heavily on what is known as the tax loss. The difference between the tax loss and the loss calculated for purposes of restitution is that restitution has to be the amount that was actually lost as a result of the crime, rather than the amount of loss that was intended. Generally, Restitution can only be for the loss that caused by the crime actually charged and not any other related conduct. United States v. Serawop, 505 F.3d 1112, 1124 (10th Cir. 2007). The only exception to this is if the loss occurred as part of a conspiracy to defraud the Government. See United States v. Cohen, 459 F.3d 490, 500 (4th Cir. 2006).  Any penalties for the offense (for example, there is a civil failure to file penalty that can be added along with  are not usually included in the calculation of restitution, but may be ordered in cases such as evasion of payment or failure to pay.  See United States v. Chalupnik, 514 F.3d 748, 754 (8th Cir. 2008). However,  any interest can be included in the restitution, even interest accruing after the  judgement is entered. See United States v. Perry, 714 F.3d 570, 577 (8th Cir. 2013).

How Goes the Government Collect Restitution?

To the Government, the ideal way to collect on a monetary punishment is payment in full, or as much as possible, either immediately or on a set date. However, if the defendant doesn’t have the resources, the court can set a payment schedule.  See U.S. v. Myers, 198 F.3d 160 (5th Cir. 1999). 

The government can generally enforce restitution for 20 years after the formal written decision of the court was entered or 20 years after the defendant is released from prison, whichever is later. 18 U.S.C. § 3613(b). Restitution acts as  a lien (legal claim against your property or assets that you have now or will have in the future) in favor of the government. If restitution is collected while the defendant is in prison, restitution will be collected by the Federal Bureau of Prisons. Once the defendant has been released, if they are subject to supervised release or probation, the local probation office will enforce restitution. After that, the burden to ensure compliance with the restitution is on the USAO and AUSA handling the case, and restitution will be paid directly to the clerk of court. 

While  restitution  can still be collected outside of the term of probation or supervised release order by the court, the IRS’ policy is that restitution that is ordered as a condition of probation or supervised release can only be collected during the period of supervised release or probation.  PMTA 2018-19 (8/23/18) at 2-3, .

What is Criminal Forfeiture?

Whereas restitution seeks to pay back money or property actually taken from the victim, criminal forfeiture seeks to penalize the defendant for any gains resulting from or used in illegal conduct. Criminal forfeiture is different from restitution because it gives the Government the ability to actually seize assets and property you may  have in your possession, if they were used in a crime or bought with the proceeds of a crime. 

Unlike restitution, forfeiture is part of the actual sentence in a criminal tax case rather than just a condition of probation or supervised release. Libretti v. United States, 516 U.S. 29, 39-41 (1995). A forfeiture allegation must be included in the criminal indictment, so the defendant will be on notice that the Government intends to seize assets. Fed. R. Crim. P. 32.2(a). In other words, if the Government intends to take your property using this mechanism, you will be forewarned. The indictment can include either a list of the property to be forfeited, or just a general statement that the Government is intending to forfeit all property that can be forfeited. Id.

What is the Criminal Forfeiture Process?

In criminal tax cases, forfeiture is used sparingly however, we’ll quickly walk you through the process. As soon as the defendant is found or pleads guilty to a tax crime where the Government is seeking criminal forfeiture, the court must determine what property is actually subject to forfeiture. United States v. Davenport, 668 F.3d 1316, 1320 n.7 (11th Cir. 2012). The Government can’t just waltz into your home and take everything you own, just because you have been convicted of a tax crime. If the Government intends to seize specific property, they must prove that the property was connected to the offense that was  charged .Typically only property that is used in or gained from the offense charged can be forfeited. United States v. Capoccia, 503 F.3d 103, 114 (2d Cir. 2007).  However, the internal revenue code has its own forfeiture provisions which specifically allow  only for the forfeiture of property used or intended for use in violating tax laws, and not for proceeds of the tax crime. See 26 U.S.C.7302 §§7303. Forfeiture is not appropriate in criminal tax cases which deal only with unpaid taxes from legal income. See Tax Directive 145, §§ 8(a) & n.5.).

Once the judge or jury determines what  can be forfeited, the court will enter a preliminary order of forfeiture  which states the amount of money or property to be forfeited. Fed. R. Crim P. 32.2(b)(2). Once this preliminary order is entered, the  Government is authorized to seize the noted property. Fed. R. Crim P. 32.2(b)(3). The preliminary order becomes a final order at the time of sentencing unless the defendant consents for the final order to be entered prior to sentencing. Fed. R. Crim P. 32.2(b)(4)(A). However, if a third party has any claim to the property being forfeited, the order can’t be finalized until that party’s claim is resolved.  Id. 

IV. Professional Sanctions and Disciplines for Tax Crimes

For  professionals, especially those requiring licensing or accreditation, tax crimes can have significant consequences beyond the criminal sentence. Professionals who commit tax crimes, including those in the tax arena such as attorneys and accountants, could be subject to discipline or sanctions  that can affect their livelihood. For example, the Office of Professional Responsibility (“OPR”) within the IRS can, among other penalties, disallow tax professionals to practice before the IRS. See Circular 230, published at 31 Code of Federal Regulations, pt. 10. Since the standard of proof for such professional discipline is lower than a criminal case, OPR could initiate proceedings against a professional charged of a tax crime even if they are acquitted. Attorneys could face disbarment, suspension from practice, or monetary sanctions. CPAs may have their license taken, and could be subject to expulsion or suspension without a hearing if they are convicted of a felony tax crime. Therefore, it is critically important for individuals working in a professional capacity to consult a defense lawyer when possibly faced with such charges.

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