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Litigation Journal

Winter 2024 | Litigation Road

When the “Taxman” Comes Knocking

Tino Lisella


  • There is no more bizarre a window into someone’s head than in tax-protestor cases.
  • Tax defiers buried the IRS in nonsensical submissions.
  • The real challenge when prosecuting tax cases was convincing the jurors to dislike the defendants more than they already disliked the IRS.
  • Taxpayers can challenge auditors’ determinations; however, this is time-consuming, costly, and stressful.
When the “Taxman” Comes Knocking
Nastco via Getty Images

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Justice Oliver Wendell Holmes famously said that “taxes are what we pay for civilized society.” Although every day seems a little bit less civilized than the day before, taxes remain critically important to the survival of our nation and preserving its infrastructure. That is why it is hard to take seriously talk of abolishing the Internal Revenue Service (IRS). Seriously? Every time I hear that, I want to ask whether the person enjoys flying. That safe travel comes courtesy of the Federal Aviation Administration and the Transportation Security Administration. Does that person enjoy taking interstate road trips? That travel comes courtesy of the Department of Transportation. All of these agencies are funded by tax revenue. Make no mistake, there is incredible room for improvement in how our tax system is administered, but a wholesale abandonment is just not realistic. As a former federal tax prosecutor who now represents individuals in the IRS’s crosshairs, I have seen both sides of a variety of tax disputes. While each party may see the dispute quite differently, there are certain aspects of litigating these cases that ring true no matter which side one is on.

In 2007, I had the great fortune of entering the Tax Division of the U.S. Department of Justice through the Attorney General’s Honors Program. In an instant, I went from being a 26-year-old law student to a federal prosecutor representing the United States in federal courts throughout the country. It was incredible . . . and terrifying.

By age 29, I had participated in three jury trials and just empaneled my fourth jury. I was lead counsel for the first time in my career, and my trial partner was a phenomenally talented trial lawyer who was 28. Unlike assistant U.S. attorneys who practice in one district and have supervisors readily accessible to them if something goes south, our home office was Washington, D.C. Yes, supervisors were a phone call away, but they did not always know the judge. And as the saying goes, “[A] good lawyer knows the law; a great lawyer knows the judge.” And we were about to embark on a two-week jury trial in Trenton, New Jersey, where co-defendants were charged with conspiring to defraud the United States and failing to pay employment taxes for multiple quarters.

Right before the judge asked me if the government was ready to give its opening statement, I leaned over to my trial partner and said, “Neither of us is even 30 years old. Can you believe the federal government is putting so much faith in us?” She looked back at me and simply said, “We got this.” And away we went.

Any current or former federal prosecutor will tell you that representing the United States is a weighty responsibility. Judges rely on prosecutors to get it right. This is especially true in tax prosecutions. Taxes are complicated. That’s why, unlike common gun and drug crimes, which require general intent, tax crimes require the government to establish willfulness. In other words, the government has to prove that the defendant violated a known legal duty. Why is that? Because Congress did not want an overzealous government running around prosecuting people for making mistakes on their taxes. But practically, that means prosecutors have to provide the jurors a window into the defendant’s thinking before asking them to return a guilty verdict.

Tax-Protestor Cases

There is no more bizarre a window into someone’s head than in tax-protestor cases. After I was at the Tax Division for a while, we started calling them tax defiers. Some would assert that Congress failed to have a quorum the day the Sixteenth Amendment passed—in 1909. Others would point out that the IRS issued a notice with their names appearing in all capital letters. Why did that matter? Well, the tax defiers would say that when referring to them in all capital letters, that was not actually them; rather, it was their “straw man.” Sometimes, they would write “accepted for value, returned for value” and tell the IRS to retrieve the amount of taxes due from a secret account supposedly established for every citizen at birth and maintained in the bowels of the Treasury. If I had not experienced their arguments firsthand when prosecuting these cases, I would have never believed that these arguments were made in federal courts throughout the country.

Tax defiers buried the IRS in nonsensical submissions. It was incredibly obstructive and took a toll on the IRS’s already limited resources. IRS witnesses testified that although these submissions had the appearance of third-rate ransom notes, someone at the IRS was obligated to read them to ensure no valid claims were buried in the nonsense. In the more sophisticated schemes, tax defiers created fake financial instruments that bore an uncanny resemblance to real checks. This resulted in millions of dollars credited, at least temporarily, to accounts of individuals who never really intended to pay their taxes.

The real challenge when prosecuting tax cases was convincing the jurors to dislike the defendants more than they already disliked the IRS—in an admissible way, of course. This is different from many other cases, where the victim is sympathetic and present or the financial harm is more personal. Telling a compelling story to a jury is nothing new or novel for trial lawyers, but telling a story about taxes to a jury is different from other cases. In tax cases, jurors are willing to accept defense counsel’s arguments about the ineptness and inflexibility of the IRS. Also, the tax laws are often complex. If a prosecutor makes them sound too complicated, jurors start to think, “Well, this poor defendant was probably very confused by what the law allowed and did not allow.”

So how does the government prevail? Well, by coming as close as possible to the “golden rule” without violating it. Instead of saying, “You pay your taxes; why shouldn’t the defendant?,” prosecutors demonstrate unfairness by showing where the money went instead of to the IRS. So, in the Trenton trial, we showed that hundreds of thousands of dollars went to call-in shopping networks. It is normal for jurors to come into court with unhappy feelings about the IRS, but that quickly changes when people who pay their taxes see others not pay their fair share in favor of vacations, cars, or boats. It is also imperative to explain to the jury that while tax laws can be complicated, stealing is not. The defendant owed taxes, knew it, and decided to spend the money on something else.

Compelling Evidence

As a tax prosecutor, I wanted to introduce the most compelling evidence I could find to prove the necessary elements of the offense charged. For example, when someone is charged with failing to pay employment taxes, the prosecution must show that the defendant was actually responsible for paying the taxes in the first place. There are many factors that can demonstrate a person has such a responsibility—among them is the ability to hire and fire employees. In the Trenton trial, we introduced evidence that one of the co-defendants demanded that an employee return to a five-day workweek after he had been working a four-day week to care for his sick wife. The co-defendant told another witness that she knew the employee would quit because he was unable to return to a five-day workweek. Further, the co-defendant confided in the other witness that she was setting this up because she was concerned the company would have to pay additional medical costs. The defendants challenged this evidence on appeal, but the appellate court held that the evidence was directly relevant to whether the co-defendant was responsible for paying the company’s taxes.

Rule 404(b) of the Federal Rules of Evidence is also critical for prosecutors when telling a compelling story to a jury. Now, employment taxes are not the subject matter of Emmy award–winning prime-time courtroom dramas, but what if I told you the defendants also withheld health insurance, child support, and 401(k) contributions, and that they failed to pay those as well? One witness explained that he learned his health insurance was canceled for nonpayment after suffering a medical emergency; another witness explained how he was nearly arrested for nonpayment of child support. Yet another witness close to retirement told the jury how she and her husband discovered that her 401(k) failed to show any contributions for months. For a prosecutor, it was important to remind courts that Rule 404(b) was a rule of inclusion because the counter-argument from a defense attorney is that the government is introducing this highly prejudicial evidence to show that the defendant had the propensity to commit the crime charged. But Rule 404(b) encompasses a broad range of permissible uses—proving motive, opportunity, intent, knowledge, and absence of mistake, among others.

Prosecutors can present very plain-vanilla employment tax cases that meet the elements. They can introduce IRS transcripts that show the unpaid taxes; they can introduce bank account records that show which individuals had signatory authority; they can call witnesses to say who hired and fired employees and performed annual evaluations. Prosecutors can demonstrate willfulness by showing previous interactions the defendants had with IRS collections. Those are all critical pieces of evidence to introduce, but you also risk putting the jurors into the rapid eye movement sleep cycle. It is far more interesting for the jury to hear how a defendant exercised his or her control over the company, rather than simply the fact that he or she had the power in the first place. Although it is sufficient to show the taxes were due and unpaid, it is far more compelling to show the jury where the money went, especially when the actual use was to support a particular lifestyle.

Offshore Tax-Evasion

While failure to pay employment taxes may not make for primetime television, some of the offshore tax-evasion prosecutions sounded more like international spy novels than tax cases. In 2016, I prosecuted a defendant who held secret offshore accounts in Israel. It was typical in those cases for customers with foreign banks to have “hold mail” designations on their accounts. This prevented banks from sending correspondence into the United States for fear of interception by federal authorities. You may wonder how customers with undeclared accounts could see their account balances if they were not receiving statements. Taxpayers were loath to check account statements online for risk of detection, so that was not a ready option. In the case I prosecuted, one of the taxpayer’s bankers concealed the taxpayer’s bank statements in a USB necklace.

Nothing lasts forever, though—except tax debt, that is—and so after the Justice Department started cracking down on foreign banks for conspiring with taxpayers to evade taxes, many banks decided to cooperate with the government. Some bank relationship managers tipped off their best customers and, as in my prosecution, suggested that the taxpayer obtain foreign passports. The bankers would then remove all “U.S. indicia” to make the account look like it belonged to a foreign citizen. In my case, the taxpayer obtained Iranian and Israeli passports; unfortunately for him, by the time he went back to his banks, his relationship managers told him that it was too late. Undeterred, the taxpayer eventually transferred his funds to a bank in Hong Kong, where they went into the account of a nominee, who then wired the funds to the taxpayer’s company in the United States. This taxpayer quite literally went to the ends of the earth to hide his assets and income from the IRS.

Perhaps what struck me most as a tax prosecutor was the disparity in sentencing. The same defendant, the same conduct, and the same loss could receive wildly different sentences depending on where the prosecution was brought. A $500,000 tax loss in the Southern District of New York might lead a judge to question why the matter was not civil, while in the Eastern District of North Carolina, a judge might wonder why the sentencing guidelines were so low. Part of this disparity is clearly related to the cost of living in certain areas relative to others. It is also informed by the types of financial crimes committed within a particular district. It is not surprising that some judges in the Southern District of New York would wonder why a $500,000 tax loss is crowding their dockets when the next matter in the queue is a Ponzi scheme involving several hundreds of millions of dollars. Studying sentencings in tax cases across the districts led me to conclude that we should expect to see rational tax cheats commit their offenses in the Northern District of California or the District of Massachusetts, and not the Eastern District of North Carolina.

Moving to the Defense Side

For some time now, I have defended clients whom the IRS is targeting either criminally or civilly (or sometimes both). Family and friends often ask what the transition was like, going to the “dark side.” I initially had no profound response. On good days, it is rewarding; on bad days, it is frustrating. But now when I am asked, my immediate answer is that going to the “dark side” gave me greater perspective. I still understand that many of the tax investigations and prosecutions are righteous, but I also see how mistakes or miscommunications could initially produce smoke where there really is no fire. This can result in overeager, albeit well-intentioned, IRS criminal agents and prosecutors continuing to pursue investigations even in the face of concrete evidence that demonstrates a lack of willfulness.

Perspective is also important when telling the story of a client accused of committing a tax crime because it is often very different from the government’s narrative. Many people who come into the criminal crosshairs of the IRS are fundamentally good people who may have made a bad choice or even a series of bad choices. In those instances, the government may still charge the taxpayer, but perhaps once the prosecutor gains greater perspective, the agreed-upon sentence can be more favorable.

Ultimately, I do exactly the opposite of what I did as a prosecutor. Instead of weaving together evidence of willfulness to present a compelling story to the jury about why the defendant is guilty, I now spend my days thinking about how to convince a prosecutor not to charge my client. From my experience as a prosecutor, I know scorched-earth tactics almost never work. I try to present defenses in the way I appreciated receiving them. Instead of coming in and screaming about prosecutorial misconduct (the equivalent of calling someone’s baby ugly), I focus on the facts that demonstrate a lack of willfulness, or perhaps I explain why there is no tax loss when you look at a tax return in its totality. In other words, I make targeted arguments that could change the direction of the case but are reasonable. And I refuse to argue that any client was “too stupid” to be willful because if I had a dollar for every time someone argued that to me when I was a prosecutor, I would not be writing this article; I would be retired and living on the beach in Malibu.

I have also gained great perspective in civil tax disputes. As a prosecutor, I never understood the animosity toward the IRS exhibited by such a large segment of the population. The cases I brought were well investigated and thoroughly reviewed by multiple people before charges were filed. Now that I handle civil tax disputes, I completely understand the anger and frustration citizens have toward the IRS.

One of the first matters I handled as a private practitioner involved the mis-assignment of income. The IRS believed certain income was attributable to my client when, in fact, it was not. No problem, I thought. The IRS notice specifically contemplated that the income might not belong to the taxpayer. Surprisingly, the IRS notice provided clear direction to rebut the assignment of income. Essentially, the IRS wanted to know to whom the income belonged and any evidence to support that assertion. I wrote a detailed letter, provided supporting financial documents, and attached an affidavit of the person to whom the IRS should have assigned the income. After about 30 days, I received a letter saying that the IRS was still reviewing my submission and needed another 30 or 60 days. Then, at the end of the next waiting period, the IRS issued two notices . . . out of two different IRS service centers . . . on the same day . . . , and they contradicted one another. One notice said that the IRS needed more time. The other said that the IRS had reviewed the submission and still found that my client owed the money, but, of course, with a higher balance, thanks to interest and penalties. So I called the IRS to figure out what was going on. To speak with a human being, you had to negotiate a series of options that only someone with a PhD in econometrics could successfully navigate. Eventually, I ended up in the queue to speak with someone, only to have the automated voice cut in to say that the queue was full, and then the IRS hung up on me.

Serendipitously, within a week of my client receiving these conflicting notices, I was attending a tax controversy conference, and in attendance was the IRS taxpayer advocate. I immediately started to complain about my experience trying to reach a human being. She graciously helped put me in touch with someone on her staff. The matter still took two more months to resolve, but I at least had a dedicated individual with whom to communicate. And when the IRS finally agreed that the income was mis-assigned, I felt a deep satisfaction in knowing that I had helped someone navigate the overwhelming bureaucracy that is the IRS.

I am also maddened by the double standard the IRS often employs in audits. There is a well-known doctrine in tax law that applies when the transaction lies outside of the plain intent of the statute—it is called the substance-over-form doctrine. Courts direct parties to look at the economic realities of a transaction rather than to the form of the transaction. But what is good for the goose does not seem to apply to the gander. I have seen the IRS reject a taxpayer’s position where the substance was clear but the taxpayer missed a step or took an extra step in completing a transaction. Thankfully, taxpayers can challenge auditors’ determinations through appeals or by filing a petition in the U.S. Tax Court; however, this is time-consuming, costly, and stressful.

While Justice Holmes said taxes are what we pay for civilized society, most citizens will likely consider the old adage about two certainties in life—death and taxes—to be a more appropriate characterization of their feelings toward taxes.