From Bad to Worse: Wire and Bank Fraud in Tax Prosecutions

For some, alleged tax fraud or evasion is the least of their worries, despite the respective maximum sentences of three and five years. Title 26, which includes the Internal Revenue Code, provides the elements necessary to establish such violations. But it can get worse for those charged with tax related crimes when brought under Title 18.  See Tax Directive No. 128 - an obscure Department of Justice policy titled “Charging Mail Fraud, Wire Fraud or Bank Fraud Alone or as Predicate Offenses in Cases Involving Tax Administration.”  Indeed, things can get much worse. Historically, prosecutors adopted a policy of not employing the fraud statutes in cases where the use of the mail or wires was merely incidental to violations arising under the internal revenue laws.  Such charges were to be brought sparingly in tax cases, and only in particular factual circumstances. Directive No. 128 changed that.

This directive significantly expands the authority of federal prosecutors to allege violations of the mail and wire fraud statutes and seek correspondingly increased penalties in tax-based cases. Under Title 18, the government may seek maximum sentences of 20 years for mail fraud or wire fraud. The sentencing guidelines for these money-laundering crimes also recommend longer sentences than their Title 26 counterparts.

Tax Directive No. 128 also authorizes prosecutors to use mail and wire fraud charges in cases involving state tax violations where mail or wire communications occurred. This expansion can transform traditional tax law cases at the state level into prosecutions for fraud and money laundering.

Needless to say, the government can significantly change the plea-bargaining dynamic by charging mail and wire fraud in tax cases. The accused may be more willing, regardless of actual wrongdoing, to plead guilty to lesser charges. Moreover, as part of the plea deal, the accused might be compelled to agree to any tax deficiency or penalty imposed by the IRS, again, regardless of the merits.  The potential for abuse is obvious.

Significantly, the mail and wire fraud statutes provide the government with an important remedy not previously available in traditional tax cases—disgorgement or forfeiture of any proceeds a defendant obtained from the fraudulent scheme. Why would a prosecutor not seek disgorgement in a tax case, which more times than not involve mail or wire communications?

The government has considerable incentive to utilize the authority provided by Directive No. 128. And there is no question that it provides prosecutors with important tools to combat money-laundering crimes. But a question presents itself: should the government utilize the Directive in cases where mail or wire communication was insignificant or merely incidental to tax evasion? There appears to be no limitation or threshold that transforms a tax case into a money laundering case.  This creates the possibility of imposing radically different jail sentences upon people who essentially commit the same crime. The choice to use Directive No. 128 in tax cases appears to lie exclusively in the prosecutor’s hands, which many people might reasonably find disconcerting.

— By Michael S. Cooper, Esq., Barnes Law

Michael Cooper is an associate attorney with Barnes Law, and is licensed to practice law in California.

The opinions expressed are those of the author and do not necessarily reflect the views of the firm, its clients, or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.