Taxpayers who file false tax returns with the IRS can find themselves in hot water. Indeed, section 7206(1) of the Internal Revenue Code (“Title 26”) makes it a felony to file a false return when the taxpayer knows that the information in the return is incorrect.
But, there are other potential federal crimes that could potentially apply when a taxpayer files a false return. For example, 28 U.S.C. § 1343, or the federal wire fraud statute, makes it a felony to defraud another party using an interstate wire communication to facilitate the scheme. Because many tax returns are now filed electronically, false returns could also fall within the federal wire fraud statute. And taxpayers who utilize the United States Postal Service could suffer potentially similar criminal consequences under the federal mail fraud statute. See 18 U.S.C. § 1341.
With all of these criminal statutes readily available to the United States, a common question I get is why does the United States not use them in addition to Title 26 criminal statutes? As discussed below, the answer lies primarily in the United States Department of Justice Tax Division’s (“DOJ-Tax”) Directive No. 128 (the “Directive”).
DOJ-Tax is charged with the prosecution of many civil and criminal cases arising under Title 26. The head of DOJ-Tax—an Assistant Attorney General—is appointed by the President of the United States and confirmed by the Senate. DOJ-Tax’s various sections—including civil and criminal—prosecute and defend cases throughout the United States.
DOJ-Tax’s general functions are provided in 28 C.F.R. § 0.70. Under that regulation, the following cases are assigned to and conducted, handled, and supervised by DOJ-Tax:
- Prosecution and defense in all courts, other than the United States Tax Court, of civil suits, and the handling of other matters, arising under the internal revenue laws, and litigation resulting from the taxing provisions of other federal statutes (except certain civil forfeiture and civil penalty matters arising under laws relating to liquor, narcotics, gambling, and firearms);
- Criminal proceedings arising under the internal revenue laws, except proceedings pertaining to misconduct of Internal Revenue Service personnel, to taxes on liquor, narcotics, firearms, coin-operated gambling and amusement machines, and to wagering, forcible rescue of seized property, corrupt or forcible interference with an officer or employee acting under the Internal Revenue laws, unauthorized disclosure of information, and counterfeiting, mutilation, removal, or reuse of stamps;
- Enforcement of tax liens, mandamus, injunctions, and other special actions or general matters arising in connection with internal revenue matters;
- Appellate proceedings in connection with civil and criminal cases enumerated in connection with (1) through (3) above and petitions to review decisions of the United States Tax Court.
Mail and Wire Fraud.
The federal crime of mail fraud is located in 18 U.S.C. § 1341. Generally, there are two elements in a mail fraud case: (1) having devised or intending to devise a scheme to defraud (or to perform specified fraudulent acts) and (2) use of the mail for purposes of executing, or attempting to execute, the scheme (or specified fraudulent acts). Schmuck v. U.S., 489 U.S. 705, 721 n. 10 (1989); see also Pereira v. U.S., 347 U.S. 1, 8 (1954) (“The elements of the offense of mail fraud under . . . § 1341 are (1) a scheme to defraud, and (2) the mailing of a letter, etc., for the purpose of executing the scheme.”).
The federal crime of wire fraud is found in 18 U.S.C. § 1343. Generally, the elements of wire fraud are the same as those under mail fraud except that the statute requires the use of an interstate telephone call or electronic communication in furtherance of the scheme. U.S. v. Briscoe, 65 F.3d 576, 583 (7th Cir. 1995); see also U.S. v. Hanson, 41 F.3d 580, 583 (10th Cir. 1994) (two elements comprise the crime of wire fraud: (1) a scheme or artifice to defraud; and (2) use of interstate wire communication to facilitate that scheme).
DOJ-Tax Directive No. 128.
The Directive describes DOJ-Tax’s authority to enforce the federal tax laws. And, it also provides parameters for when DOJ-Tax will authorize the prosecution of mail and wire fraud when the offense relates to or is associated with a Title 26 crime.
First, the Directive reaffirms that DOJ-Tax approval is required for any criminal charges if the conduct at issue arose under the federal tax laws, regardless of the criminal statute or statutes ultimately used to charge the defendant. Moreover, the Directive states that DOJ-Tax authorization is required before charging mail fraud and/or wire fraud. In addition, DOJ-Tax authorization is required if a criminal charge is based on the submission of a document or information to the IRS.
Second, the Directive states that DOJ-Tax may approve charges of mail fraud and wire fraud in a tax-related case involving schemes to defraud the United States or other persons if there was a large fraud loss or a substantial pattern of conduct and there is a significant benefit to bringing the charges instead of or in addition to Title 26 violations. However, the Directive cautions that, absent unusual circumstances, DOJ-Tax will not approve mail or wire fraud charges in cases involving only one person’s tax liability, or when all submissions to the IRS were truthful. See, e.g., 18 U.S.C. § 1001.
Third, the Directive states that DOJ-Tax may consider bringing fraud charges (such as those above) if there is a significant benefit at the charging stage, at trial, or at sentencing. For example, if the specific charge would permit a forfeiture of the proceeds of a fraudulent scheme and permit the United States to describe the entire scheme in the indictment, DOJ-Tax may authorize fraud charges at the charging stage.[i]
Fourth, the Directive states that DOJ-Tax will not authorize the use of mail, wire or bank fraud charges to convert routine tax prosecutions into RICO or money laundering cases unless “unusual circumstances warrant it.” The Directive cautions United States Attorneys who wish to charge a RICO violation or a money laundering charge in any criminal matter arising under federal tax laws to properly obtain the authorization of DOJ-Tax.
A copy of the Directive can be found here.
The Kolfage Indictment.
On May 4, 2021, the government filed an Indictment against Brian Kolfage, the alleged local president of “We Build the Wall”.[ii] In the Indictment, it alleges that Mr. Kolfage willfully made and submitted to the IRS a false tax return for his tax year 2019 tax year. Also in the Indictment, it alleges that for his 2019 tax year, Mr. Kolfage: (1) received “hundreds of thousands of dollars” from, among others, “WEBUILDTHEWALL, Inc;” and (2) knowingly caused a wire communication—i.e., his 2019 individual income tax return—to be transmitted in interstate commerce. Based on these allegations, the Indictment alleges Mr. Kolfage has violated section 7206(1) of Title 26 and 18 U.S.C. § 1343.
A copy of the indictment can be found here.
Given the charges in the indictment, Mr. Kolfage faces up to 20 years of imprisonment for violations of section 7206(1) and 18 U.S.C. § 1343. Moreover, because of the wire fraud charge, the government may seek civil forfeiture of his assets. As this case clearly shows, although the Directive generally protects taxpayers from being simultaneously charged with Title 26 violations and mail or wire fraud charges, there are notable exceptions.
[i] 18 U.S.C. § 981 permits civil forfeitures for wire and mail fraud.
[ii] “We Build the Wall” was an alleged non-profit that solicited donations to build private sections of the wall along the United States-Mexico border.