money laundering

Tax Evasion, Money Laundering; To-may-to, To-mah-to?

Money Laundering

18 U.S. Code § 1956, which addresses federal money laundering, provides for a general punishment range of a fine of not more than $500,000 or twice the value of the property involved in the transaction, whichever is greater, or imprisonment for not more than twenty years, or both.

Money Laundering Favored by Prosecutors

The government has found a way to essentially double dip in available punishments for the same act. By merely re-characterizing conduct that would traditionally be considered “tax evasion” to conduct that also constitutes “money laundering,” the government is able to utilize forfeiture proceedings to obtain the money involved in the crime. Thus, not only is a defendant personally liable under tax evasion laws and penalties, but their property and assets are also subject to seizure by the government.

Traditionally, IRS cases (tax evasion) were pursued either as a criminal case under Title 26 or as through a civil audit, neither of which would implicate federal forfeitures of assets. The subject of those proceedings was the tax evader (in personam). The focus was to punish the wrongdoer while recovering lost tax revenue. So the tax evader’s property could be subject to garnishment or lien. In contrast, the subject of a civil forfeiture proceeding is the property itself (in rem). The focus is on the specific asset or property without regard for its owner. Thus, innocent parties may lose their property in a forfeiture proceeding and may be forced to expend resources to defend their property in court.

There are some significant differences between the two theories. First, the evidentiary standard is lower in a forfeiture proceeding than it is in a tax assessment case, which makes it easier for the government to seize your property. Second, in tax evasion cases, the penalty is confined to the lost tax revenue. However, in money laundering based forfeiture proceedings, the government is entitled to all monies “involved in” or comingled with the criminal scheme, which is much broader. Third, the opportunities afforded to the offender are different. In tax cases, the IRS must give the tax evader an opportunity to make things right. In forfeiture cases on the other hand, the government can decide to take assets swiftly and without the owner’s knowledge. Thus, by pursuing charges that allow for forfeitures instead of merely relying on tax evasion procedures, the result can be much harsher from the perspective of the tax payer/ property owner.

As a result of some recent policy changes, the Department of Justice has effectively blurred the distinction. The current practice is to treat tax evasion cases as wire fraud and money laundering cases. Bearing in mind that the latter categories allow for asset forfeitures, whereas the former category does not, it should be no surprise that the government prefers pursuing wire fraud and money laundering charges, instead or in addition to tax evasion charges. After all, it is the government that keeps the assets that are forfeited which may be allocated throughout its budget. In lieu or in addition to Title 26 theories, the government is authorized to prosecute under Title 18 fraud theories in cases where an offender steals tax refunds or files false tax returns. Not coincidentally, Title 18 offenses allow for both civil and criminal forfeiture proceedings.

Despite the fact that tax evasion cases have traditionally been deemed inappropriate for asset forfeiture pursuits, the U.S. Attorney’s Office has been given authority from the Tax Division of the Department of Justice to use forfeiture proceedings for assets that relate to tax investigations.

“If a multi-agency criminal investigation includes both tax (and/or tax-related) and non-tax offenses, and the restraint, seizure, and/or forfeiture of property is legally based upon the non-tax criminal offenses, then the Tax Division has no authority over the restraint, seizure, and/or forfeiture of said property.” Tax Division Directive No. 145 “Restraint, Seizure and Forfeiture Policy in Criminal Tax and Tax-Related Investigations and Prosecutions” (January 30, 2014), Footnote 3.

While at first blush this sounds like a limitation upon Government action, it is quite the opposite. In the past, the Tax Division, which is a very slow moving, restrained arm of federal prosecution, controlled all tax related prosecutions. This meant that agents and prosecutors needed specific approval from the Tax Division to pursue any case that touched a tax return. However, that oversight is eviscerated by this Directive. Now, agents and prosecutors are free to pursue these assets without the oversight of the Tax Division.

By merely characterizing the same conduct as “wire fraud” or “money laundering” or any other “non-tax criminal cases” in addition to “tax evasion,” the government can seize accounts and assets under civil forfeiture laws without the Tax Division’s approval or involvement. This is particularly troubling for taxpayers because they are no longer afforded an opportunity to repay the Government through restitution (criminal sentencing) or examination (audit) routes before the Government tries to collect from any other source it deems fit. Now when facing a forfeiture proceeding, taxpayers could lose their assets by a swift seizure and may have to defend their case in a costly court battle against the government.

This is not a trivial distinction. Forfeiture proceedings deprive citizens the opportunity to rectify mistakes from whatever resources they choose. For example, take a scenario where John Q. Citizen, a husband whose wife works faithfully as a school teacher and is unaware of his shenanigans, fails to report income that results in a Government loss of $100,000 in tax revenue. Under the old paradigm, John Q. could face a civil audit or a criminal prosecution. If either avenue found him in tax arrears he would be expected to repay $100,000 to the Government. However, tax evasion, either civilly pursued or criminally pursued, does not support forfeiture so John Q. would have the opportunity to repay the Government with whatever asset he could muster (a loan, sale of separate property, sale of community property, unrelated bank accounts or retirement account, or practically any asset from any legal source). However, if a Title 18 justification is used to support a forfeiture for the very same conduct, now the Government can take any related asset or even any asset commingled with dirty assets. That means that if John Q. pays 2 mortgage payments on the family home with money that was not reported to Uncle Sam, then the Government can seek the house, even if his wife actually paid more towards the house.

For a discussion why ancillary proceedings and the innocent owner defense will likely provide very little relief for John Q.’s spouse, see The Systemic Denial of Due Process in Forfeiture Proceedings.

The Department of Justice tries to seal this massive gusher through a Tax Division proclamation that prohibits the U.S. Attorney’s Office from pursuing forfeiture when the conduct under scrutiny is purely tax evasion.

“No personal property shall be seized for forfeiture in a tax and/or tax-related investigation if the personal property consists entirely of legal source income and the only criminal activity associated with the personal property is that unpaid taxes remain due and owing on the income.” Tax Division Directive No. 145 “Restraint, Seizure and Forfeiture Policy in Criminal Tax and Tax-Related Investigations and Prosecutions” (January 30, 2014), Section 8(a).

Unfortunately, this protection turns out to be a distinction without a difference because it is easy to construe an act of tax evasion as an additional offense (wire fraud, money laundering, etc.) thereby opening the door to the use of forfeiture proceedings.

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About the Author

Steve Jumes

Steve Jumes is former Assistant United States Attorney and he is also a Board Certified Criminal Law Specialist. Steve handles federal and state criminal matters in addition to being one of the nation's foremost asset forfeiture attorneys. A former prosecutor at both the state and federal level, Steve Jumes is admitted to the Northern, Eastern, and Western Federal Districts in Texas. Steve Jumes has tried over 100 cases to juries in the state and federal system.Steve Jumes focuses primarily on white collar crimes. He is experienced in high-profile money laundering, wire fraud, health care fraud, and tax matters.