CCA 200031021: Criminal Tax declines search warrant referral over willfulness evidence

Plain-English summary

District Counsel resubmitted a proposed search warrant in a criminal tax investigation. After reviewing undercover transcripts, the IRS Criminal Tax office found the evidence of a willful tax crime too weak to support referral of the warrant to the Justice Department. It noted that the target made statements that could support a good-faith misunderstanding defense under Cheek and that the draft affidavit omitted those statements. The memo also called for a narrower warrant supported by evidence that other identified people used the same alleged scheme. It returned the request without authorizing referral, leaving open the possibility of further investigation and assistance.

Ruling snapshot

• Question: Did the resubmitted warrant request establish probable cause for a criminal tax search and support referral to the Justice Department?
• Outcome: Advice given. Referral was not authorized on the evidence and affidavit presented.
• Key authorities: IRC § 7201; Cheek v. United States, 498 U.S. 192 (1991); Fourth Amendment probable cause principles.

Full text (IRS public release)

INTERNAL REVENUE SERVICE

Number: 200031021
Release Date: 8/4/2000

                                                  April 27, 2000
CC:            :CT-705110-99



UILN: 7201.00-00


MEMORANDUM FOR                     DISTRICT COUNSEL

FROM:                  Barry J. Finkelstein
                       Assistant Chief Counsel (Criminal Tax)

SUBJECT:               Resubmission of Search Warrant Request
                       for the

This responds to your memorandum dated                       in which you resubmitted the
search warrant request in the above referenced case. By memorandum dated
                     , our office declined to authorize the referral of the search warrant
to the Tax Division, Department of Justice, citing a lack of probable cause to believe the
items sought to be seized were located on the premises to be searched or were likely to
contain evidence of the crimes alleged to have been committed. Upon review of the
most recent request together with the undercover transcripts, we are now of the opinion
the case suffers from a lack of probable cause with respect to whether the target has
committed a crime. Specifically, willfulness of the target is questionable given the
exculpatory statements he made during conversations with the undercover agent and
the lack of equal or greater inculpatory statements.

                                     DISCUSSION

By way of background, this case was presented to the Undercover Review Committee
on                , as case number            . The issue of willfulness was raised
during the undercover committee meeting. The minutes of the meeting clearly reflect
Martin Klotz of the Criminal Tax Division pointed out the investigation needs to be
careful of a Cheek1 defense. Michael Harrison, Chief, Special Investigative
Techniques, added “they need to get incriminating statements.” We feel these
concerns have not been adequately addressed in the investigation or the affidavit.




1
    Cheek v. United States, 498 U.S.192 (1991).
                                             2
CC:     :CT-705110-99

Our concern focuses on              possible challenge to the warrant based on a viable
Cheek defense. The Fourth Amendment protects an individual’s reasonable
expectation of privacy by requiring a finding of probable cause for the issuance of a
valid search warrant. Probable cause has been defined as “facts and circumstances
. . . such as to warrant a man of prudence and caution in believing that the offense has
been {or is being} committed” and that seizable property can be found at the place or
on the person to be searched. Brinegar v. United States, 338 U.S. 160, 175 (1949);
Carroll v. United States, 267 U.S. 132, 162 (1925). The issue in this case that arises is
whether a crime has been committed. In order for there to be a crime under the
criminal tax statutes, there must be a showing of willfulness. “Willfulness” is “a
voluntary, intentional violation of a known legal duty.” Cheek v. United States, 498 U.S.
192, 200 (1991). Accordingly, under Cheek, the government must be able to show that
         intentionally advised           to violate the law.

This element is brought into question by many of the             statements to the
undercover agent. For instance,         advises that the         on the undercover agent’s
                                . [                                           ].
advises that

                ].         insisted that when the undercover agent
                                                        .
        ].           states the recent changes to the law

          ” [                                            ].        advises the undercover
agent he has


             . According to        ,
                                 .[                                            ]. Such
statements raise a willfulness issue in this case on behalf of        .

Another area of concern is the affidavit as currently drafted focuses exclusively on the
inculpatory evidence presented in the case. While we do not dispute             advises
        they always maintain control in the structures he puts together, we believe the
affidavit should address the exculpatory statements made by             to the undercover
         2
agents. Such exculpatory statements set the stage for a Cheek defense. In order to
overcome this possible defense, the affidavit must neutralize the exculpatory
statements with evidence that clearly demonstrates             willfulness.
The scope of the warrant also needs to be limited. The affidavit currently identifies



2
  In Bigford v. Taylor, 834 F.2d 1213 (5th Cir. 1988), the Fifth Circuit held “[police] may
not disregard facts tending to dissipate probable cause.”
                                            3
CC:     :CT-705110-99

            whose reported income dropped substantially.3 It must be demonstrated
that these      used the same scheme as the scheme explained and sold to the
undercover agent. This scheme focused on

You must be able to show which of these                 utilized a similar scheme to
reduce their              .

Based on these concerns, we are returning the search warrant request to you without
authorizing its referral to the Department of Justice. Should further assistance be
required, please feel free to contact Martin Klotz or Martin Needle of the Criminal Tax
Division on (202) 622-4470.




3
   The affidavit indicates                     were identified through       invoices
turned over to the Revenue Agent by          . Based on this list, the        individual
federal income tax returns were examined to determine if a pattern of evasion existed.
Of this group,      showed some pattern of reducing income from        to       (two
could not be located on the IRS computer system) and the remaining        continued to
file consistent, high income returns. Accordingly, your permeated with fraud argument
was withdrawn.