The average prison sentence in criminal tax prosecution cases has risen dramatically in the past decade, from 18 months in 2001 to 25 months in 2011, according to statistics from the Internal Revenue Service.
Over that same time period, a record number of investigations were initiated as the IRS and the Justice Department step up their enforcement efforts against taxpayers and tax preparers.
Steve Katz, a partner at the San Francisco law firm Sideman & Bancroft and head of the firm’s tax controversy group, noted that the increase reflects the fact that most federal tax sentences are driven by the federal sentencing guidelines. “A judge can depart or vary the range, depending on the individual circumstances of the case, but the judges generally follow the guidelines,” he said in an interview Wednesday.
Increased dollar loss amounts have also led to higher sentences. “Some time ago there was a change in the guidelines where the sentences were adjusted slightly, depending on the loss number,” said Katz. “It used to be the case, probably even before this period of time starting in 2001, where many tax cases were resolved with no jail time, just home confinement or probation. My goal as a defense attorney is to have it turned into probation or home confinement. But with prison sentences being under the guidelines, it’s almost required that there’s almost always some prison time.”
Katz believes the prison sentences were imposed because probation and home confinement were not seen as having enough of a deterrent effect on tax offenders.
“Not having a prison sentence and just probation didn’t stop the activity,” he acknowledged.
The defense attorneys and prosecutors typically negotiate to see whether the case can be resolved through a plea bargain. Prosecutors often want to impose some prison time, but the defense may be able to whittle down the tax loss figure to reduce the sentence imposed on their client.
“In many cases there’s a lot of back and forth over the loss suffered by the government,” said Katz. “Where we can persuade them that it’s a lower number, we can negotiate a home confinement or a shorter prison sentence.”
However, some prosecutors will resist a resolution such as making the case a misdemeanor as opposed to a felony. “They’re after some longer sentence," said Katz. "It’s not only about punishing the individual defendant, but these cases are more about sending a message to others out there who are thinking about going down this road that the consequences are serious.”
The U.S. Attorney’s offices that prosecute tax crime cases frequently publicize the results as a deterrent. “They’ll have a press release when someone has been indicted and when there’s a prison sentence,” said Katz. “There will be a greater amount of publicity around tax filing time to serve as a reminder to folks to make sure to file accurately.”
Katz has also noticed an increased amount of enforcement against tax preparers. “That’s one way to get at a lot more people and to stop a lot more bad activity is to get at the preparers,” he pointed out. “With one preparer, they can deal with 50 or 100 taxpayers. We have seen a lot of that lately, with enhanced activity by the Office of Professional Responsibility at the IRS, looking at whether preparers are doing things wrong and suspending them from practice.”
Katz has also seen more enforcement by the IRS against taxpayers with assets in foreign bank accounts.”There have been a series of programs to encourage taxpayers to declare their offshore accounts by coming in and filing their accounts, paying tax on any income not declared previously, and paying some stiff penalties to avoid prosecution,” he said. “The IRS is doing a very good job of finding them through the cooperation they are now getting through banks turning over lists of customers. It’s quite clear from all the programs I go to and things you read from the IRS that they will be after this for years to come. It’s a huge way to go after revenues.”
His firm has handled a substantial number of such cases and he is seeing more clients coming back into the system, either through the IRS’s Offshore Voluntary Disclosure Initiative programs or from people who have become the targets of criminal investigation.
“They’ve been at a it for a number of years, and it’s picking up because they’re getting cooperation from banks,” said Katz. “They’re going to keep at it through the voluntary compliance, where they’ve been bringing in lots of money. They’re also going to make sure that if people are not participating in these programs, when the IRS can show they have one of these accounts and if they didn’t file, they’re pursuing that. We’ve seen a lot of activity.”