Be Careful What You Tell the IRS: Federal Appeals Court Upholds Criminal Obstruction Charge
Section 7212 makes it unlawful for any person to attempt to interfere with the administration of the laws of the Internal Revenue Code. For example, that provision makes it unlawful for any person to make certain threats against an Internal Revenue Service (IRS) employee. Moreover, the “omnibus clause” of Section 7212 prohibits corrupt acts designed to obstruct or impede the due administration of the Internal Revenue Code. Those who violate Section 7212 may face felony charges with up to a maximum of three years in prison.
In many cases, the question in Section 7212 cases is what conduct constitutes “obstruction”? The recent decision in U.S. v. Avery, No. 19-2429, 2021 WL 1157846 (6th Cir. Mar. 26, 2021) provides some additional color on the scope of such language and is the topic of this Insight.
U.S. v. Avery.
Integrated HCS Practice Management (Integrated) managed an affiliated medical practice. It was also responsible for handling payroll and payroll taxes for various affiliated businesses. Integrated’s owners included: Edward Cespedes (Cespedes); Hussein Huraibi (Huraibi), Yisroel Sigler (Sigler), and Michael Weinberger (Weinberger).
According to evidence at trial, Cespedes served as Integrated’s “nominal CEO”. Joe DeSanto (DeSanto), on the other hand, ran Intrepid’s day-to-day operations. Gerri Avery (Avery) was Integrated’s office manager and DeSanto’s personal assistant. In these roles, Avery frequently answered billing questions for the company and directed the company’s accountants to pay certain bills. She, along with Cespedes and Sigler, were also signatories on the company’s bank accounts, including payroll accounts. In addition, she was partially responsible for making decisions regarding which company creditors were paid.
Integrated’s Financial Woes and the Creation of Perspective Solutions.
Due to financial difficulties, Integrated stopped making payroll tax payments to the IRS starting with its third quarter of 2013. Significantly, when a company (whether corporation, partnership, or other entity) stops making payroll, certain “responsible persons” may become liable for a portion of the payroll taxes, provided they willfully fail to make such payments to the IRS. See Sec. 6672. Generally, the IRS proves this willfulness component for the so-called trust-fund recovery penalty (TFRP) if the responsible person is aware of the unpaid payroll taxes but continues to prefer and pay other creditors over the IRS’ claims.
During trial, there was testimony that showed that Cespedes and DeSanto had chosen to use Integrated’s remaining funds “to continue the business” and had agreed that they would “deal with the payroll taxes later.” However, in January 2014, Integrated ceased its operations.
In February 2014, Perspective Solutions (PS) opened. Although PS’s company registration documents listed Weinberger as owner of PC, the company was actually owned by DeSanto, who had asked Weinberger to falsely list himself as the owner and member-manager of PS on various legal documents. Shortly after PS began its operations, PS began employing most of Integrated’s former employees. Similar to other former Integrated employees, Avery moved to PS and functioned in essentially the same role as she had with Integrated.
As it often does, the IRS became aware of Integrated’s failure to remit proper payroll taxes. Accordingly, in April 2014, the IRS initiated an examination regarding Integrated’s delinquent payroll taxes. During the examination of Integrated, the IRS agent in charge sent letters to Cespedes and Avery seeking additional information about Integrated. This information included: (1) bank signature cards; (2) canceled checks; (3) bank statements; and (4) meeting minutes. The IRS agent also requested a meeting with Avery.
After receiving the IRS letters, Avery reached out to Cespedes via email on August 1, 2014, and stated:
I received . . . [the IRS’s letter] in the mail on Saturday – I cannot make this meeting on the 19th – so I will reschedule – but my real question is – who will go with me to this meeting? We, as a company, do not have canceled checks – unless I request all of them from the time we started.
Shortly thereafter, Avery attempted to contact the IRS agent and left a voicemail on August 13, 2014. According to the IRS’ agents notes regarding the voicemail, Avery had informed the agent that the scheduled interview date and time were “inconvenient for her” and she would not be attending. In addition, Avery communicated to the IRS agent that she had hired an attorney who would follow up with the IRS agent at a later date. Significantly, Avery stated that she knew the IRS agent had been “working with” Cespedes but that the agent should also be looking at Huraibi and Sigler prior to looking at other employees. In addition, Avery notified the IRS agent that she had never received any canceled checks and was “not sure how to get all of the other things.” She failed to provide the IRS agent with a callback number.
Based on her examination, the IRS agent asserted TFRPs against Cespedes and Avery.
IRS Collection Action.
In early 2016, the IRS communicated to Avery that it intended to begin collection actions against her related to the TFRP assessments. In response, Avery hired an attorney to represent her. On the basis of his conversations with Avery, the attorney drafted and sent a letter to the IRS in March 2016 seeking an abatement of the TFRP assessments. The letter included a memorandum of fact and argument signed by Avery under penalty of perjury that stated that Avery’s previous employer, DeSanto, had asked her to work on site for Integrated. In the letter, Avery repeatedly asserted that she was unaware of Integrated’s finances and uninvolved in the financial and managerial decisions of the company.
In February 2018, the DOJ Tax Division indicted DeSanto, Cespedes, and Avery. DeSanto and Cespedes were each indicted on three counts for failing to collect, truthfully account for, and pay payroll tax. Both pleaded guilty.
The DOJ Tax Division also indicted Avery with one count of violation of Section 7212. The Indictment against her alleged that Avery had made four types of false statements to the IRS. However, for purposes of trial, the DOJ focused on two statements: (1) Avery downplaying her and DeSanto’s roles with Integrated; and (2) her knowledge of and access to Integrated’s finances and financial records.
On the basis of the facts above, the jury concluded that Avery was criminally culpable of violating Section 7212. The district court denied Avery’s motion for acquittal and her motion for a new trial. However, the district court provided Avery a below-guidelines sentence of two years’ probation and ordered her to pay restitution of $167,000 (the reduced amount of TFRP assessments remaining) jointly and severally with DeSanto and Cespedes.
Avery challenged her conviction at appeal on two grounds: insufficiency of the evidence and admissibility of certain evidence.
Sufficiency of the Evidence.
To support a Section 7122 claim under the omnibus clause, the government must show that Avery: (1) corruptly; (2) endeavored to obstruct or impede; (3) a particular administrative proceeding of the IRS. Marinello v. U.S., 138 S. Ct. 1101, 1105 (2018). For these purposes, “to act corruptly means to act with the intent to secure an unlawful benefit for oneself or another.” U.S. v. Miner, 774 F.3d 336, 343 (6th Cir. 2014). A person “endeavoring to obstruct or impede” must intend to obstruct or impede an IRS investigation, but need not succeed; even an endeavor “doomed to failure from the start” creates culpability. U.S. v. Tackett, 113 F.3d 603, 611 (6th Cir. 1997). And the statutory term “obstruct or impede” connotes a broad meaning—it can refer to anything that blocks, makes difficult, or hinders. Marinello, 138 S. Ct. at 1106. However, the government must show a “nexus” between the defendant’s conduct and a particular administrative proceeding, such as an investigation. Id. at 1109. The “nexus” requires a relationship in time, causation, or logic with the [administrative] proceeding. Id.
As indicated above, on March 22, 2016, Avery’s attorney sent a TFRP abatement letter to the IRS. At trial, the government contended that several portions of the letter constituted obstruction regarding her communications that she had little involvement with and knowledge of Integrated’s finances. These included statements that: (1) DeSanto put Avery on the company’s checking account, she did not have an office, and she would only periodically be presented with checks to sign; (2) Avery was not involved in discussions regarding when company bills would be paid; and (3) Avery did not decide which creditors would be paid.
But, at trial, the government introduced evidence that contradicted these claims. For example, the government produced emails from Avery showing she had discretion as to what creditors would be paid and when. According to the Sixth Circuit, based on this and other evidence: “[T]he government presented sufficient evidence for a rational juror to find beyond a reasonable doubt that Avery corruptly endeavored to impede or obstruct enforcement of the tax code by making and adopting false statements in the March 2016 letter that minimized her knowledge of Integrated’s finances in an attempt to avoid paying the IRS’ assessment against her.”
The Avery decision shows that taxpayers must be careful what statements they make to the IRS during the course of any IRS investigation—whether at the examination or collection level. Indeed, the Avery decision shows that the government will seek to punish those who make false statements to government officials during the course of those investigations. In high-risk IRS investigations, taxpayers should carefully consider whether it is appropriate to engage a tax professional for representation.
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