On February 18, 2013, the 5th Circuit of the United States Court of Appeals released its decision in The United States v. Heard. The two defendants in the case were convicted for evading income taxes, filing false returns and bribing public officials. The defendants appealed their convictions and sentences on various grounds, all rejected by the 5th Circuit. The defendants objected to their sentences as well as their convictions based on evidentiary and sufficiency grounds.
The defendants were convicted of a scheme where they withheld over $5 million in payroll taxes while failing to pay the taxes due to the IRS. The defendants also diverted corporate funds for personal purposes and failed to report the income. The defendants were accused and convicted of owning and operating several corporations in order to conceal the failure to pay employment taxes over eighteen years. Corporate checks were cashed by employees and the proceeds were used by the defendants for personal expenses.
The defendants made several evidentiary challenges that the trial court and appeals courts both ultimately rejected. The trial court had refused to allow testimony regarding the investigating IRS agent’s suspension for viewing pornography at work. The defendant sought to prove that the investigation and prosecution was conducted in order to curry favor with supervisors as a result of this official misconduct. The trial court refused to allow questioning on this subject and the appeals court affirmed, finding that it was not relevant since the investigation into the defendants began before the official misconduct was detected by supervisors.
The 5th Circuit also sustained the trial court’s refusal to admit evidence that a defendant sought to admit showing that he had previously prepared payroll taxes on the behalf of others correctly and with no misstatements of income. The defendant attempted to introduce this as habit evidence showing that he regularly reported income and paid taxes. The trial court refused to admit this testimony and the appeals court sustained the ruling finding that evidence that this was not proper habit evidence and that evidence that the defendant did not commit a crime in the past was not evidence of innocence in the present case.
While these evidentiary rulings are probably more closely confined to the facts of this case, the 5th Circuit’s decision on a sentencing enhancement should give some concern to tax evasion defendants. The defendants’ sentences were increased based on failing to report illegally obtained income. One defendant challenged this, arguing that the income was obtained through is legal security business and that the mere fact that the income was not reported, and taxes were not paid was insufficient to find that the income was obtained illegally. The defendant argued that this was essentially double counting the offense by punishing his tax evasion twice, once as a conviction for the underlying offense and then again when it was used to enhance his sentence.
The court ruled against the defendant, finding that the income was derived by illegally withholding money due to the IRS. The court found that the fact that failing to report the income and illegally withholding the payments from the IRS were two distinct acts, justifying the sentencing enhancement. This has broad implications for any defendants convicted of tax evasion since it’s hard to see how this sentencing enhancement wouldn’t apply to any tax evasion scheme. It’s hard to imagine any situation where a defendant would be convicted of evading the income tax, yet would have fully and accurately reported all income to the IRS. Therefore, any defendant who is convicted of tax evasion is likely to face a sentencing enhancement for failing to report their illegally obtained income.