Lead Opinion
Aftеr a jury trial, Florence L. Peters was convicted of four counts of making false statements on her tax returns in violation of
I
BACKGROUND
A. The Contours of an IRS Investigation
The IRS splits the responsibility for enforcing the nation’s tax laws between its two investigative divisions. The Criminal Investigative Division (“CID”) is charged with investigating criminal violations of the tax code and related federal statutes. CID investigators are called “special agents.” Like many other criminal law enforcement agents, they carry firearms and badges. In addition, special agents must recite an administrative warning prior to soliciting information from taxpayers. See Beckwith v. United States,
On the other hand, the Examination Division of the IRS is responsible for conducting civil tax audits. Examination Division investigators are known as “revenue agents.” In contrast to special agents, revenue agents do not carry firearms; nor are they required to provide taxpayers with an administrative warning. Although an Examination Division audit typically concludes with some sort of civil settlement between the IRS and thе taxpayer, such an audit may uncover evidence 'that causes the revenue agent to refer the ease to the CID for criminal investigation. Under IRS regulations, a revenue agent who uncovers a “firm indication of fraud on the part of the taxpayer” must immediately suspend her audit and refer the case to the CID. See Internal Revenue Manual § 4565.21(1). At that point, the CID enters the case and the IRS’ efforts become focused on the possibility of criminal prosection. See generally Michael I. Saltzman, IRS Practice and Procedure ¶¶ 12.01 & 12.03[1][a]. This case, in large part, concerns the distinction between a civil tax audit and a criminal tax investigation.
B. The Investigation
In October 1988, Marshall Peters, the former husband of podiatrist Dr. Florence Peters, called the Internal Revenue Service to report that he had information indicating that Dr. Peters Rad been cheating on her taxes. Marshall’s call was received by Special Agent Gerald Padar of the CID. On October 6, Special Agent Padar went to Marshall’s home; there he met with Marshall and his new wife, Eloise. At that meeting, Marshall showed Padar original corporate
Special Agent Padar held this information for 18 months but did not open a formal criminal investigation. Instead, he maintained a file on Dr. Peters in the bottom drawer of his desk, where he collected the information supplied by Marshall and Eloise. On a few occasions, Padar reviewed the checks in that file. In addition, on one occasion, Padar drove by Dr. Peters’ home to see what he could glean about her lifestyle and to attempt to corroborate information he had received from Marshall and Eloise concerning an addition to Dr. Peters’ home. During that time, Padar received a few calls from Marshall and Eloise seeking information on the progress of the investigation.
Padar’s file on Dr. Peters ultimately landed on the desk of Thomas Ridgeway, a group manager in the Examination Division. Ridgeway assigned the case to Revenue Agent Margo Thompson, whom he described as a “rookie” in corporate audits. The Peters case was Thompson’s first corporate audit that needed significant further developmеnt. When Ridgeway passed the file on to Thompson, he informed her that the case had begun because of an informant’s tip received by the CID. He instructed Thompson to meet with the informants and to conduct an audit to determine if Dr. Peters had, in fact, deducted personal expenses as business expenses. Nonetheless, Thompson did not prepare a written audit plan because, in her view, the audit was routine. Thompson held this view because she had worked on other cases that were prompted by an informant’s tip but were treated as routine civil audits and did not evolve into criminal investigations.
Revenue Agent Thompson began her audit by inputting the checks on the computer and calling up Dr. Peters’ 1987 and 1988 returns. On July 2, 1990, Thompson initiated the first IRS contact with Dr. Peters. Thompson sent a standard form letter to Dr. Peters notifying her that her corporate returns for 1987 and 1988 had been selected for an audit and requesting a meeting. Attached to the letter was the standard Information' Document Request for a corporate audit, requesting numerous corporate and accountant records. Thompson also attached copies of two other documents which are routinely sent to the taxpayer when the IRS initiates a civil audit: (1) IRS Publication 1, a form called “Your Rights as a Taxpayer,” and (2) IRS Notice 609, the “Privacy Act Notice.” The purpose of IRS Publication 1 is to inform the taxpayer of her rights and some of the basic procedures and policies associated with a civil audit. The Privacy Act Notice informs the taxpayer of the IRS’ legal right to ask for information, the reason the agency is asking for it (“to carry out the tax laws of the United States”) and the consequences of failing to cooperate with the audit (“you may be charged penalties and, in certain cases, you
In response to this notice, Dr. Peters contacted the IRS and informed Thompson that her accountant, William Morrison, would represent her in the audit. Commencing shortly thereafter, Thompson conducted a series of personal meetings and telephone contacts with Morrison. During the course of these communications, Morrison asked Thompson whether she was conducting a “routine” or “ordinary” audit, and she replied in the affirmative. Although he did not remember Thompson specifically using the words “random” or “routine,” he “absolutely” had the impression that it was a routine audit. Morrison came to this conclusion because of the normal manner in which Thompson was proceeding more than anything she said. Indeed, at the time of her initial meetings with Morrison, Thompson did not believe that any fraud was involved or that Dr. Peters had any criminal problems. She conduсted the audit like any other. She did not inform Morrison that the investigation had been prompted by an informant’s tip or referred by the CID.
On November 5, 1990, Thompson first met with Dr. Peters. Prior to this meeting, Thompson had discovered an apparent discrepancy of approximately $100,000 in Dr. Peters' tax filings. However, she did not know yet whether this was a real discrepancy. This initial meeting lasted about two hours. Thompson conducted the meeting in the same manner as any other civil audit. She did not give Dr. Peters any indication or warning that there might be a possible criminal problem. She used the standard computer-generated interview form and asked the same general questions that she would ask in any audit. At the meeting, Thompson reiterated requests for information concerning Dr. Peters’ corporation in order to verify the purpose of various corporate expenditures claimed by Dr. Peters. At this point, Thompson did not believe there was fraud but had concluded that there were expenses that needed to be explained.
However, by March 1991, Thompson began to suspect that the case might involve fraud. On March 28, after Thompson received Morrison’s signed power of attorney, she informed him that she had discovered approximately $200,000 in unreported income аnd that she had questions regarding the legitimacy of some claimed business expenses. A few days later during another conversation, Morrison stated: “If [Dr. Peters] didn’t report $200,000, it would be a case that would be a referral to CID.” R.121-4 at 518. Thompson did not respond. By April 30, 1991, Thompson had concluded that the case involved fraud and began to prepare a criminal referral. However, whether the case bore the “firm indications of fraud” necessary for a criminal referral was ultimately her supervisor’s decision.
By that time, Thompson had a new supervisor, Bruce Wilson. Wilson reviewed the case and concluded that there were not “firm indications of fraud.” After reviewing Thompson’s work, he determined that there were too many errors in Thompson’s analysis to substantiate a fraud referral. In particular, he believed that Thompson had disallowed all claimed expenses without analysis and had not given Dr. Peters adequate opportunity to prove the business deductions or to explain the apparent excess income. He concluded that there were “indicia of fraud” but decided that Dr. Peters should be given further opportunity to explain the discrepancies discovered by Thompson.
On December 17, 1991, Roth met with Lensink at Dr. Peters’ home. The purpose of the visit was to observe Dr. Peters’ claimed home office. At this meeting, Roth noticed a significant change in Lensink’s attitude; she was no longer interested in reaching an agreement on the proposed adjustments. By this time, Lensink and Mittl had completed their analysis of both Dr. Peters’ income and claimed business expenses. On December 19, 1991, the Revenue Agents completed a proposed criminal referral concerning Dr. Peters’ 1988 and 1989 corporate and individual income tax returns. The proposed referral was submitted to Wilson. After reviewing the agents’ work, Wilson concluded that the casе was now sufficiently developed and that there were in fact “firm indications of fraud.” Accordingly, he signed the referral. Morrison and Roth first learned of the referral in January of 1992.
After further review of the information compiled in the Examination Division audit, the CID recommended criminal prosecution of Dr. Peters. On April 11, 1995, a federal grand jury indicted Dr. Peters on four counts of criminal tax fraud. Counts I and III charged her with fraudulent conduct in violation of 26 U.S.C. § 7206(1) with regard to her corporate tax returns for 1988 and 1989. Those counts alleged that Dr. Peters had underreported her corporate income and had deducted personal expenses as business expenses on those returns. Counts II and IV charged her with making false statements on her personal returns for the same years in violation of § 7206(1). In addition, on November 14, 1995, the grand jury returned a superseding indictment. In that indictment, the grand jury added a fifth count. Count V charged Dr. Peters with obstructing the due administration of the Internal Revenue Code in violation of 26 U.S.C. § 7212(a).
C. Proceedings in the District Court
Prior to her trial, Dr. Peters moved to suppress the records and statements that she had offered to the IRS auditors between April 1990 and January 1992. She asserted that the IRS obtained that evidence in violation of her Fourth and Fifth Amendment rights by telling her that they were conducting a routine civil audit when in fact they were carrying out a covert criminal investigation. After a six-day suppression hearing, the district court found that the civil revenue agents did not deliberately mislead Dr. Peters as to the nature of their investigation. Accordingly, the court denied Dr. Peters’ motion to suppress. See generally United States v. Peters,
After a lengthy trial in December 1996, a jury found Dr. Peters guilty on all five counts of the superseding indictment. Dr. Peters now asks this court to set aside her conviction on two grounds. First, she contends that the district court erred in denying her motion to suppress. In addition, she asserts that the evidence presented at trial was not sufficient to support the jury’s verdict.
II
DISCUSSION
A.
Dr. Peters contends that the district court erred in denying her motion to sup
1.
A consensual search is unreasonable under the Fourth Amendment or viola-tive of due process under the Fifth Amendment if the consent was induced by fraud, deceit, trickery or misrepresentation by the revenue agent.
To prevail on this point defendant must produce clear and convincing evidence that the agents affirmatively mislead [sic] him as to the true nature of their investigation. Defendant must also prove that the misinformation was material in his decision to speak with the agents. Simple failure to inform defendant that he was the subject of. the investigation, or that the investigation was criminal in nature, does not amount to affirmative deceit unless defendant inquired about the nature of the investigation and the agents’ failure to respond was intended to mislead.
We turn, then, to the first part of the Serlin inquiry: Whether the civil revenue agents affirmatively misrepresented the nature of their investigation to Dr. Peters and her representatives. The district court found that the revenue agents, through their conduct and words, represented to Dr. Peters that they were conducting an ordinary or routine civil audit. Accordingly, if the agents were in fact conducting a criminal investigation under the auspices of a civil audit, then they affirmatively misrepresented the nature of their investigation. See United States v. Wadena,
We believe that the district court’s approach to this issue is a sound one. Although this court has not yet addressed the precise issue presented in this case,
If, during an examination, an examiner discovers a firm indication of fraud on the part of the taxpayer, the tax return preparer, or both, the examiner shall suspend his/her activities at the earliest opportunity without disclosing to the taxpayer, the taxpayer’s representative, or employees, the reason for such suspension.
Internal Revenue Manual § 4565.21(1). Therefore, if a revenue agent continues to conduct a civil audit after developing “firm indications of fraud,” a court may justifiably conclude that the agent was in fact conducting a criminal investigation under the auspices of a civil audit.
Nonetheless, as the district court noted, the “firm indications of fraud” standard is a difficult standard for federal courts to apply because it is inherently vague and depends,
In navigating the narrow course necessitated by these two perils, courts must remember that the “firm indications of fraud” rule is but a tool for courts to utilize in determining whether the revenue agents made an affirmative misrepresentation to a defendant or her representatives concerning the nature of their investigation. Although we are mindful that the “firm indications of fraud” rule cannot be expressed in a set of absolute criteria and that the facts and circumstances of each case must be assessеd in their own light, we believe that the following discussion can serve as a guide to the courts who are called upon to navigate these narrow waters in the future. Our review of the relevant case law suggests several considerations that ought to be helpful to the district courts.
The IRS has been found to have engaged in impermissible deception if the Service has conducted a civil audit at the behest of a criminal law enforcement agency conducting an ongoing criminal investigation. This rule is based on the Fifth Circuit’s holding in United States v. Tweel,
Active involvement of CID personnel in a civil audit prior to the completion of a criminal referral also has been treated as compelling evidence that the IRS has proceeded beyond the point of “the firm indications of fraud” and attempted to use the audit as a covert criminal investigation. See United States v. Caldwell,
Continuation of audit activities after the revenue agent begins preparation of the fraud referral also may be indicative of an agency attempt to gather information for a criminal prosecution while keeping the taxpayer in the dark as to the true nature of its investigation. See, e.g., United States v. Wadena,
The case law suggests that a revenue agent has developed a firm indicatiоn of fraud when she has established that the taxpayer has engaged in' a consistent pattern of substantial underreporting of income and/or overstatement of deductions such that an intent to evade taxes can be inferred. See Internal Revenue Manual § 4231 HB 940(1)(a)-(b), (f)1; see also United States v. Grunewald,
The case law recognizes that an assessment of the taxpayer’s intent is the most critical element in a revenue agent’s determination of whether “firm indications of fraud” exist in any particular ease. See Caldwell,
Finally, a firm indication of fraud should be distinguished from a first indication of fraud. This principle is set forth clearly in the Manual:
A firm indication of fraud must be distinguished from a first indication of fraud. A first indication of fraud can be described as a mere suspicion of fraud. Examiners are legally permitted and should endeavor to ask the taxpayer, the preparer, the representative, or any other involved party for an explanation of the “discrepancies” which are the basis of the examiners[.’] suspicion of fraud and any other question(s) which will resolve the question of the taxpayer’s intent. The determination of firm indication of fraud is a factual determination which can only be determined on a case by case basis. An examiner who is in doubt should consult with his/her group*456 manager and/or Examination Fraud Coordinator to determine if the indicators of fraud are sufficiently developed.
Internal Revenue Manual § 4565.21(1); see also id. at § 52(10)1.2(3) (“Firm indications of fraud confirm, support, and add to initial suspicions of fraud.”). Revenue agents must take adequate steps to perfect indications of fraud and must ensure that the fraud is substantial prior to making a referral to the CID. See id. at § 52(10)1.2(3)(a)-(d); see also Saltzman, IRS Practice and Procedure ¶ 12.03[l][a]. This development is necessary because the CID must have sufficient information from which “to evaluate the criminal potential of the case.” Internal Revenue Manual § 4231 HB 981; see also Caldwell,
We emphasize that the law of this circuit remains the test established in Serlin. A consensual search is unreasonable under the Fourth Amendment-or violative of the due process clause of the Fifth Amendment if the consent was induced by fraud, deceit, trickery or misrepresentation by the revenue agents. For those elements to be present, the defendant must establish that the agents affirmatively misled her as to the true nature of their investigation and that this affirmative misleading was a material factor in her decision to give information to the agents. With respect to the first factor— whether affirmative misleading took place— we believe, as do the other circuits that have addressed the question, that the “firm indications of fraud” rule serves a useful function in guiding the district court’s inquiry on the ultimate question as to whether there has been a deliberate misleading by the government. The foregoing discussion notes circumstances that, when present, have suggested strongly to reviewing courts that deceit and trickery amounting to such an affirmative misrepresentation have occurred. In identifying such circumstances, courts have viewed with a jaundiced eye the IRS’ deviations from its own rules. and regulаtions. That does not mean, of course, that such a deviation is sufficient, standing alone, for exclusion of evidence. See United States v. Caceres,
2.
We now apply these principles to the case at hand and address the issue of whether the revenue agents made affirmative misrepresentations to Dr. Peters concerning the nature of them investigation. In this case, we must review four stages of the IRS’ civil audit of Dr. Peters: (1) Special Agent Pa-dar’s initial involvement in this case and his subsequent referral of the matter to the Examination Division; (2) Revenue Agent Thompson’s investigation prior to her preparation of a fraud referral; (3) Bruce Wilson’s decision to reject Thompson’s referral and to continue the civil audit of Dr. Peters; and (4) the investigation of Revenue Agents Lensink and Mittl prior to their, preparation of the fraud referral.
We turn first to the issue of whether the IRS engaged in affirmative deceit by conducting a civil audit of Dr. Peters after Special Agent Padar’s initial involvement in
The district court’s finding that the IRS had not developed “firm indications of fraud” at the time Padar walked the file across to the Examination Division is not clearly erroneous.
We turn next to the issue of whether Revenue Agent Thompson developed “firm indications of fraud” prior to the preparation of her criminal referral. As the district court found, the record contains uncontroverted evidence that Thompson-through her words and actions—represented her audit as an ordinary or routine civil audit. Based on the record before us, we cannot conclude that the district court’s finding that Thompson’s representations were honest is clearly errone
The next stage of the investigation we must examine is the period immediately following Thompson’s submission of her proposed referral to the CID. As we noted earlier, Thompson submitted her fraud referral to her supervisor Bruce Wilson in May 1991. However, after reviewing the case, Wilson concluded that there were not “firm indications of fraud” because Thompson had made
The IRS did not act improperly by continuing its audit of Dr. Peters after Thompson initiated her fraud referral in the Spring of 1991. The IRS guidelines specifically instruct revenue agents to consult with then-supervisors in determining whether a particular audit is ripe for referral to the CID. See Internal Revenue Manual § 4565.21(1). Moreover, there is nothing in the record which suggests that Wilson did not honestly believe that Thompson’s work was faulty and needed further development and that Dr. Peters should be given further opportunity to explain the discrepancies noted by Thompson. In fact, the explanation offered by the IRS in this case is nearly identical to the one accepted by the Fifth Circuit in United States v. Powell,
We now turn to the final stage of the civil audit and examine the actions of Revenue Agents Lensink and Mittl prior to their referral of this matter to the CID. Based on the record before us, we cannot conclude that the district court’s finding that Lensink and Mittl did not develop firm indications of fraud prior to their initiation of the criminal referral is clearly erroneous. As we noted earlier, in November 1991, Lensink asked Dr. Peters’ attorney if his client would sign a consent form to extend the three-year civil statute of limitations. See 26 U.S.C. § 6501(a). As the district court noted, this request strongly suggests that, at that point, the IRS was still pursuing a civil ease and that the revenue agents had not yet developed “firm indications of fraud.” Indeed, such an extension would be unnecessary if the Service had already made the decision to pursue either civil fraud charges (with no statute of limitations) or to commence a criminal prosecution (with a six-year statute of limitations). See id. at §§ 6501(c)(1) & 6531.
In light оf the foregoing discussion, we conclude that the district court’s finding that the IRS did not engage in affirmative deceit during its audit of Dr. Peters is not clearly erroneous.
B.
We turn now to Dr. Peters’ contention that the evidence presented at trial was not sufficient to support the jury’s verdict. First, with respect to Counts I and III, which charged Dr. Peters with making false statements on her corporate returns, she contends that the government’s proof was insufficient because, at trial, the government calculated her taxes using a method of accounting different from the method used by her accountant in preparing her corporate returns. Second, with respect to Counts II and IV, which charged Dr. Peters with making false statements on her personal returns, she asserts that the government’s proof was insufficient because the government failed to present any proof that the unreported income diverted from her corporation represented
1. Counts I & III: Accrual v. Cash Basis
Dr. Peters contends that the government’s evidence with respect to Counts I and III (charging her with making false statements on her 1988 and 1989 corporate returns) was not sufficient to support the jury’s verdict because the government’s proof used a different method of accounting from that used by her accountant. The government used the cash basis method of accounting to make its case against Dr. Peters; however, she asserts that her accountant used the accrual method. In making this argument, Dr. Peters points to her corporate tax returns. On those returns, her accountant clearly checked the box indicating that the corporation was an accrual basis taxpayer. However, despite the marking on the return, Dr. Peters’ accountant testified repeatedly that he used the cash basis method to prepare her corporate returns. This conflicting evidence was put before the jury during the course of the trial, and it chose to credit the accountant’s testimony that Dr. Peters was in fact a cash basis taxpayer. We shall not second-guess the jury’s determination on appeal.
2. Counts II and IV: Constructive Dividends
Dr. Peters’ second contention involves Counts II and IV, which charged her with making false statements on her individual returns. In those counts, the government alleged that Dr. Peters diverted corporate funds into her personal accounts and that she made corporate expenditures for her personal benefit. These funds wеre not reported on either her corporate or personal return. Dr. Peters contends that the government failed to prove that she received such income because it did not prove that her corporation had sufficient earnings and profits in the relevant years to pay “constructive dividends.” In her view, the government was required to put forward such proof in order to show that any diverted funds constituted taxable income to her rather than nontaxable return of capital.
In making this argument, Dr. Peters relies on the rule used in several civil tax cases involving the proper characterization of corporate funds which have been diverted to the sole shareholder of a wholly-owned corporation. In such a ease, the government must provide evidence of corporate earnings and profits to show that the money “skimmed” by the taxpayer was a taxable “constructive dividend” as opposed to nontaxable return of capital. See e.g., Truesdell v. Commissioner,
In civil tax cases the purpose is tax collection and the key issue is the establishment of the amount of tax owed by the taxpayer. In a criminal tax proceeding the concern is not over the type or the specific amount of tax which the defendant has evaded, but whether he has willfully attempted to evade the payment or assessment of tax.
The difficulty in automatically applying the constructive distribution rules to this case is that it completely ignores one essential element of the crime charged: the willful intent to evade taxes, and concentrates solely on the nature of the funds diverted. That latter aspect is not the important element. Where the taxpayer has sought to con*461 ceal income by filing a false return, he has violated the tax evasion statutes.
Miller,
The Second Circuit recently has taken a view different from that expressed in Williams, Miller and Davis. See United States v. D’Agostino,
D’Agostino and the other criminal cases we have just discussed involved alleged violations of 26 U.S.C. § 7201,
The focus of § 7206(1) is clearly on the taxpayer’s intent. Here, there is no evidence in the record indicating that Dr. Peters intended the distributions at issue to be a return of capital. The record shows, however, a consistent pattern of diverting corporate funds into her personal accounts and making corporate expenditures for her personal benefit. Such a pattern is sufficient evidence to support the jury’s conclusion that Dr. Peters filed tax returns which she did not “believe to be true and correct as to every material matter.” 26 U.S.C. § 7206(1). Ac
Conclusion
For the reasons stated in the foregoing-opinion, we affirm the judgment of the district court.
AFFIRMED
Notes
. That section, provides in pertinent part:
§ 7206. Fraud and false statements
Any person who—
(1) Declaration under penalties of perjury.Willfully makes and subscribes any return, statement, or other document which contains or is verified by a written declaration that it is made under the penalties of perjury, and which he does not believe to be true and correct as to every material matter;
shall be guilty of a felony and, upon conviction thereof, shall be fined not more than $100,000 ($500,000 in the case of a corporation), or imprisoned not more than 3 years, or both, togethеr with the costs of prosecution.
. That section provides in pertinent part:
§ 7212. Attempts to interfere with administration of internal revenue laws
(a) Corrupt or forcible interference. — Whoever corruptly or by force or threats of force (including any threatening letter or communication) endeavors to intimidate or impede any officer or employee of the United States acting in an official capacity under this title, or in any other way corruptly or by force or threats of force (including any threatening letter or communication) obstructs or impedes, or endeavors to obstruct or impede, the due administration of this title, shall, upon conviction thereof, be fined not more than $5,000, or imprisoned not more than 3 years, or both, except that if the offense is committed only by threats of force, the person, convicted thereof shall be fined not more than $3,000, or imprisoned not more than 1 year, or both. The term "threats of force", as used in this subsection, means threats of bodily, harm to the officer or employee of the United States or to a member of his family.
. Dr. Peters practiced podiatry through a personal services corporation, Dr. Florence L. Peters, Ltd.
. On an earlier occasion, Marshall and Eloise filled out a claim form seeking a reward for the disclosure of original information about a criminal violation of the Internal Revenue Code. The record does not indicate whether they ever received a reward for their assistance in this case.
.On one occasion .after he had given the file to the Examination Division, Eloise contacted Pa-dar and suggested that Dr. Peters would attempt to deduct expenses incurred in connection with her daughter’s Bat Mitzvah as business expenses on her 1990 tax return. Padar forwarded this information to the Examination Division.
. At this point, Thompson had not yet received a signed power of attorney authorizing Morrison to act on behalf of Dr. Peters' corporation. Accordingly, under IRS guidelines, she could receive information from Morrison but could not disclose any information to him concerning the investigation.
. At the suppression hearing, Morrison testified that he would have discontinued the audit and advised Dr. Peters to retain an attorney if Thompson had informed him of any of these facts at the initiation of the audit.
. Because all of the constitutional violations alleged by Dr. Peters depend on a showing of the existence of fraud, deceit and trickery, it is not necessary to discuss each constitutional claim separately. See United States v. Prudden,
. In United States v. Mapp,
In Serlin, although we dealt with the issue of deception during the course of the IRS investigation, that case involved a taxpayer who was aware of the criminal nature of the investigation but did not realize that he was a potential target of that inquiry. Indeed, the Serlin court noted that its case differed from the "typical deceit case,” which "involves a taxpayer who claims that his volubility was induced by assurances that the investigation was 'routine' and only civil rather than criminal.” See Serlin,
. We note that the approach we adopt today differs slightly in its articulation from the formula set forth by the Eighth Circuit in Wadena and Grünewald. In those .cases, the Eighth Circuit set forth the following standard:
Evidence obtained in the course of a criminal investigation, where the defendant has not been apprised of the nаture of the investigation, may be suppressed only if the defendant establishes that:
(1) the IRS had firm indications of fraud by the defendant, (2) there is clear and convincing evidence that the IRS intentionally misled the defendant, and (3) the IRS's conduct resulted in prejudice to defendant's constitutional rights.
Wadena,
. See Grunewald,
.See United States v. Groder,
. Under the IRS guidelines, a special agent may not participate in a civil audit. However, a revenue agent may participate in a joint investigation with the CID; once a joint investigation is undertaken, the criminal aspects of the investigation take precedence and the IRS must present the investigation to the taxpayer as such. See Internal Revenue Manual §§ 9311.83(1) & (31)610; see generally Michael I. Saltzman, IRS Practice and Procedure ¶ 12.01 (In recognition of the fact that attempts to pursue the criminal and civil aspects of a case concurrently can jeopardize successful prosecution of a criminal case, “the Service’s policy is that criminal action in a case takes precedence over its civil aspects and that any civil enforcement action involving the same tax and periods as an active criminal investigation is suspended or deferred until the criminal aspects of the case are closed.”).
. Cf. Robson,
. That subsection also gives other examples of conduct by taxpayers evidencing an intent to evade taxes: false statements, attempts to hinder examination (e.g., failure to answer questions and repeated cancellations of appointments), testimony of employees regarding irregular business practices, destruction of books and records, or transfer of assets for the purpose of concealment.
. We note at the outset that the IRS did not have an affirmative duty to warn Dr. Peters or her representatives that the audit could lead to criminal consequences or that it was prompted by an informant's tip. See United States v. Serlin,
. Dr. Peters makes much of the fact that, on one occasion, the informants contacted Padar with additional information after the investigation had been transferred to the Examination Division and that Padar passed this new information along to Revenue Agent Thompson. The evidence in the record shows that Padar was the passive recipient of this information and that, at the time he received it, he was no longer investigating Dr. Peters. The fact that he passed that information along to the branch of the Service currently handling the investigation hardly constitutes active involvement in the audit.
. Dr. Peters relies heavily on the fact that Thompson's supervisor, Bruce Wilson, testified that it was improper for a revenue agent to characterize her audit as "routine” or "random." Dr. Peters contends that Thompson made such characterizations in response to the inquiries of her accountant, William Morrison. However, Morrison testified that he did not remember Thompson specifically using the words “random" or "routine." Instead, he concluded that the audit was routine from the ordinary way in which Thompson was proceeding. In any event, even if Thompson did characterize the audit as "routine” during her initial meetings with Morrison, such a characterization does not amount to an affirmative misrepresentation because, as discussed above, Thompson did view the audit as routine at that time. Cf. Piper,
. Dr. Peters also contends that Thompson misrepresented thе nature of her audit by mailing her IRS Publication 1, a form entitled "Your Rights as a Taxpayer” and IRS Notice 609 ("The Privacy Act Notice”) at the initiation of the audit. The IRS sends these forms to taxpayers at the inception of routine, ordinary audits, but does not mail them to the targets of a criminal investigation. As we concluded above, the district court's finding that Thompson believed herself to be engaged in a routine and ordinary civil audit is not clearly erroneous. Accordingly, to the extent her decision to mail Publication 1 was consistent with the Service's practices at the inception of a routine civil audit, it was not an affirmative misrepresentation. In addition, the documents themselves contain no statements which amount to an affirmative misrepresentation of the Service's understanding of the case at the time they were mailed.
Similarly, Dr. Peters asserts that the suppression of the evidence is required in this case based on the Taxpayer Bill of Rights of 1988 (as distinct from her constitutional arguments). See Pub.L. No. 100-647, §§ 6226-6247, 102 Stat. 3342, 3730-3752 (1988) (codified as amended in scattered sections of 26 U.S.C.). Section 6227 of that law required the IRS to "prepare a statement which sets forth in simple and nontechnical terms — (1) the rights of the taxpayer and the obligations of the Internal Revenue Service during an audit.” Id. at § 6227(a). The statute further required the statement to "be distributed ... to all taxpayers the Secretary contacts with respect to the determination or collection of аny tax (other than providing tax forms).” Id. at § 6227(c). In response to this statutory directive, the IRS developed Publication 1. Because that document was provided to her by statutory directive, Dr. Peters asserts that any misrepresentations in Publication 1 would require suppression of the evidence obtained by the IRS during the civil audit. We note, at the outset, that the Taxpayer Bill of Rights contains no provision providing for suppression of the evidence as a remedy. However, because we conclude that Publication 1 contains no affirmative misrepresentations concerning the Service's understanding of the case at the time it was mailed, we need not decide whether the Taxpayer Bill of Rights of 1988 provides a viable ground for the suppression of evidence in a criminal tax proceeding.
. Accordingly, we need not reach the second prong of the Serlin inquiry — whether the agents’ representations were material to Dr. Peters’ decision to cooperate with the IRS during the audit.
.That section provides:
§ 7201. Attempts to evade or defeat tax.
Any person who willfully attempts in any manner to evade or defeat any tax imposed by this title or the payment thereof shall, in addition to other penalties provided by law, be guilty of a felony and, upon conviction thereof, shall be fined not more than $100,000 ($500,-000 in the case of a corporation), or imprisoned not more than 5 years, or both, together with the costs of prosecution.
. The taxpayer in Miller was charged with violations of both §§ 7201 and 7206(1). See
. See supra note 1.
Concurrence Opinion
concurring.
Peters, who turned records over to the IRS in an audit, wants to prevent their use in this criminal prosecution because, she insists, the IRS had “firm indications of fraud” on her part before or during the audit. She advances two propositions. The first is that acquisition of evidence must cease once the IRS acquires enough information to refer the case to a criminal prosecutor. The second is that “firm indications of fraud” are inconsistent with a representation that the audit is “civil”, rendering cooperation involuntary and the acquisition of documents a violation of the fourth amendment. (Peters also invokes the due process clause of the fifth amendment, but it is inapplicable to the seizure of evidence. Sacramento v. Lewis, — U.S. -, -,
Probable cause to believe that a crime has been committed is the constitutional requirement for a warrant; it is not an objection to a seizure. Why should a solid basis for believing that the suspect has committed a crime require the government to curtail its investigation? “Law enforcement officers are under no constitutional duty to call a halt to a criminal investigation the moment they have the minimum evidence to establish probable cause, a quantum of evidence which may fall far short of the amount necessary to support a criminal conviction.” Hoffa v. United States,
Although the Constitution permits agents to keep gathering evidence long after they have “firm indications” of crime, Congress has blocked the use of one investigative tool. While “a Justice Department referral is in effect” it is not possible to enforce a summons for tax records. 26 U.S.C. § 7602(c)(1); United States v. Michaud,
Was disclosure voluntary? If a revenue agent uses deceit to get a taxpayer to turn over documents that could not have been secured either by a summons under 26 U.S.C. § 7602(b) or by a search warrant, it might make sense to suppress the results in order to ensure that the statutory line is honored. But what role would “firm indications of fraud” play in such an inquiry? The statutory question is whether the case has been referred for criminal prosecution, not whether the IRS has “firm indications of fraud”. As for the constitutional standard: although the validity of consent obtained by overstating the weight of evidence in hand— making it look to the suspect like the jig is up, so there is no point in resisting — is questionable, why would understating the weight of existing evidence imperil voluntariness? A suspect who believes that the IRS lacks the evidence to commence a criminal prosecution, but who knows that records will furnish what the IRS needs,.has powerful reasons to withhold consent. If despite this the suspect provides tax records, it is hard to see how the decision could be called involuntary. Law enforcement agencies are understandably reluctant to tell suspects what evidence they have gathered (indeed, they do not have to prоvide this information even after prosecution has begun). How can reticence about the weight of evidence the government possesses overbear a suspect’s free will and prevent rational decision-making? That is the standard of voluntariness. Ohio v. Robinette,
My colleagues opine that consent following an agent’s misstatement about the weight of existing evidence is involuntary. Several of our cases say that a suspect in a tax case cannot havé the evidence suppressed unless he shows, by clear and convincing evidence, that material misstatements of fact undercut the voluntariness of the consent to search. United States v. Serlin,
One of these days the Supreme Court will confront the tension between these lines of cases. Ah that matters today, however, is that lack of candor about the purpose of an investigation is no more fatal to a consent search than it is to a confession — and that in either case the court of first instance must take all of the circumstances into account. Any attempt to separate “firm indications of fraud” from “first indications of fraud” — the distinction my colleagues suggest — is a snipe hunt, for reasons developed in Hoffa and reiterated in Beckwith. Because voluntariness of a consent is a question of “fact” whose resolution by the trier of fact is subject to deferential appellate review, our role is limited. Robinette,