Chapter 10

How Are Tax Crimes Punished?

In 1931, Alphonse Gabriel Capone was sentenced to 11 years in prison and fined $50,000 for tax evasion. This was the harshest sentence ever delivered for tax evasion. Al Capone ran an enterprise that included many illegal doings – his was the era of our country’s Prohibition – and he was said to have raked in as much as $100 million a year.

Many years hence, there have been a handful of tax evasion “criminals” that made the news from Willie Nelson to Leona Helmsley. As interesting as these stories may be, I don’t intend to write about the rich and infamous’ attempted tax evasion stories. Instead, I’ll discuss the much more relevant (though relational) final phase in criminal-tax-case sentencing. 

Here I will explain what you can expect after a guilty plea or a finding of guilt by a jury. I will also discuss how and why a sentence is chosen, and what some of the common punishments are for a tax crime.

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The 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 a 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. See Fed 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.

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). 

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.

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 money 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. 

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. 

Conclusion

If you are charged with a tax crime, it is critically important to consult a defense lawyer and one that knows tax law could be vitally important, too. Forty-three different levels of tax crimes offense promises a lot of sentencing wiggle room depending on your charges. 

The IRS estimates that about 17 percent of taxpayers fail to comply with the tax code in one way or another when filing their returns,” but a very tiny percentage of that percentage are ever convicted of a tax crime. 

Can the IRS tell the difference between illegal activity and an honest mistake? If you’ve met with some special agents from the IRS and now you need a good attorney, I think you know the answer to that. 

Give me a call. I can and will defend you with all my resources and experience in tax law if we decide working together would be mutually beneficial. If not, I can give you references that could be of some help. 

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