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Sentencing in Criminal Tax Cases: It’s Not What You Think by ROBERT S. HORWITZ

The United States Sentencing Commission  recently released a study of sentencing of federal offenders convicted of economic crimes.  The study included within the category of “economic crimes” thus sentenced under §2B1.1 of the United States Sentencing Guidelines (USSG), tax crimes and identity theft.  Tax crimes encompass Title 26 (Internal Revenue Code) violations, conspiracies to defraud the United States of taxes, and the use of stolen identities for filing tax forms (stolen identity refund frauds).

The study focused on offenders sentenced during the fiscal year ended September 30, 2017, but also included some data for fiscal 2013 through 2016.  Some interesting tidbits from the report include:

The median loss of all crimes studied was just over $100,000. Four categories of crimes had over $700,000 median loss:  securities & investment crimes – $2.1 million; health care fraud – $1.08 million; mortgage fraud – $999,000; government procurement fraud – $739,000.  With an average loss of $398,000, tax fraud was well above the median  for all economic crimes but well under the median amounts for the four top categories of economic crimes.

1% of all federal defendants sentenced in FYE 2017 were sentenced for economic crimes. Tax crimes accounted for less than 5% of all defendants sentenced for economic crimes, or less than 0.5% of all defendants sentenced in fiscal 2017. The two categories of crimes that accounted for most defendants sentenced: drug crimes at 30.6% and unlawful entry into the US (25.5%).

Tax crimes made up the following percentages of defendants sentenced between FYE 2013 and FYE 2017:

2013                2014           2015           2016           2017

2.8%                3.8%           4.5%           5.4%           4.5%

The Ninth Circuit, which includes federal district courts in California, accounted for almost half of all defendants sentenced in federal criminal cases in 2017 (44.6%) but only 13.1% of defendants convicted of economic crimes.

The Central District of California accounts for 31.5% of economic crimes sentenced in the Ninth Circuit in 2017 with 251 defendants, which is more than half of the total numbers in the Second Circuit (which includes New York) or the Seventh Circuit (which includes Illinois). Los Angeles leads the way in prosecuting economic crimes.

Tax offenders made up 4% of all federal defendants sentenced for economic crimes in the Ninth Circuit in fiscal 2017. More defendants were sentenced for tax offenses in the Central District of California than in the other three districts in California combined.

The Circuit with the most tax offenders sentenced in fiscal 2017: the Sixth Circuit (Michigan, Ohio and Kentucky), over half of whom were in the Western District of Michigan (think Kalamazoo). There were more defendants sentenced for tax offenses in the Western District of Michigan than in the Third Circuit (which includes Pennsylvania), the Second Circuit (which includes New York), the DC Circuit or the Seventh Circuit (which includes Illinois).

Of defendants sentenced in FYE 2017 for tax crimes, 21.7% were in the 11thCircuit, 22.4% in the 6th Circuit and 11.8% in the 9th
The race of persons sentenced for tax crimes in 2017 were: blacks (55.5%), whites (28.8%) and Hispanic (12.2%).

Women accounted for 13.4% of all defendants sentenced in 2017, but 32.7% of defendants sentenced for economic crimes and 36.8% of defendants sentenced for tax crimes.

The median age for tax offenders was 44; 23.5% had college degrees, 41.5% had some college but didn’t graduate; and the rest (35%) had no college.
The study also looked at sentencing adjustments applied in economic crime cases. The frequency with which adjustments were applied to tax offenders sentenced in 2017:
Victim Adjustment (includes a person whose identity

is used unlawfully or without authorization)                            36.4%

Sophisticated means enhancement                                           19.9%

Aggravating Role enhancement                                               13.2%

Mitigating Role enhancement                                                     5.5%

Abuse of Trust/Use of Special Skill enhancement                   17.3%

 

The sentencing guidelines have offender history categories, which is the number of prior convictions a defendant has. Category 1 (0 or 1 prior offense) is the lowest category.  The higher the category, the higher the potential sentence.  Over half of economic crimes offenders sentenced in 2017 fell into Criminal History Category 1, the highest percentage of any category of crimes.  7% of tax offenders were in category 1.

At sentencing, offenders convicted of economic crimes had the lowest percentage incarcerated (66.3%) compared to 88% for all federal offenders sentenced in 2017 and the highest rate of probation only (20.8% versus 6.9% for all federal offenders). For tax offenders, the percentages were as follows:

Prison only                              71.7%

Prison and confinement           11%

Confinement and probation    6.3%

Probation only                            10%

For those offenders sentenced, the average for all economic offenders in 2017 was 23 months in prison. This compares to an average prison term of 45 months for all federal offenders sentenced to a term of imprisonment.  The average period of imprisonment for tax offenders sentenced to prison was 31 months.
Part of the reason that tax statistics skew they way they do based on race, education and length of sentences is that stolen identity refund fraud is included in the sentencing statistics.  Many of these cases involve organized criminal gangs that obtain stolen identity information (name, social security number, etc.) and, using that information, file false returns to obtain refunds.

Note that the statistics reported by the USSG do not jibe with IRS Criminal Investigation’s statistics about percentage of defendants sentenced to prison and average term of imprisonment.  This is because CI investigates Bank Secrecy Act violations and money laundering and is involved in public corruption and drug prosecutions, among other non-tax crimes.

Contact Robert S. Horwitz at horwitz@taxlitigator.com or 310.281.3200   Mr. Horwitz is a principal at Hochman Salkin Toscher Perez, P.C., former Chair of the Taxation Section, California Lawyers’ Association, a Fellow of the American College of Tax Counsel, a former Assistant United States Attorney and a former Trial Attorney, United States Department of Justice Tax Division.  He represents clients throughout the United States and elsewhere involving federal and state administrative civil tax disputes and tax litigation as well as defending criminal tax investigations and prosecutions. Additional information is available at http://www.taxlitigator.com.

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