22.
Coordination of Parallel Criminal,
Civil, and Administrative Tax Proceedings
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I. Introduction
The Department has long recognized that effective law enforcement
includes parallel criminal, civil, and administrative proceedings. It is in
the government's best interests to punish the wrongdoers through criminal
prosecution, maximize financial recoveries, and stop ongoing conduct that
harms the government. The Tax Division advocates the use of the following
civil proceedings, where appropriate, even when parallel criminal
proceedings are underway or are contemplated:
- civil injunction proceedings to stop abusive tax scheme and scam
promoters and false return preparers, when the promotion or preparation
is ongoing or likely to recur and the harm to the government is
significant
- civil examination and collection proceedings (e.g., audits,
collection actions, erroneous refund suits) against customers of
abusive scam and scheme promoters or against clients of false return
preparers
- civil collection proceedings against criminal defendants
- jeopardy or injunction proceedings to prevent the dissipation or
dilution of assets
- forfeiture proceedings to seize the proceeds of a crime
Generally, courts have approved of parallel proceedings. Nonetheless,
when pursuing them, attorneys should take care to use process appropriately
and to comply with all procedural and substantive laws. The following issues
are properly considered.
II. Use of Process for Proper Purposes
An overarching principle that must be followed in parallel proceedings
is the use of process for proper purposes. Agents and/or attorneys may
conduct investigative and litigation tasks when justified by genuine case
purposes. However, civil processes may not be used as a pretext to obtain
information for a criminal investigation and criminal processes may not be
used as a pretext to obtain information for a civil investigation.
See Section VIII, infra.
III. Case Strategy and Theories
Consistency. The government's theories in the civil and
criminal cases should not be inconsistent. To this end, it may be
necessary to review drafts of pleadings to be filed (complaints,
motions for summary judgment, discovery responses, and indictments/
informations), subject to disclosure limitations.
Timing. The timing of actions should be considered so as to
maximize the government's effectiveness, while avoiding or minimizing
harm to any of the proceedings. For example, generally, a criminal
investigation or prosecution should not delay or forestall most
parallel civil proceedings. However, it may be necessary to
temporarily delay overt actions in a civil case until covert actions
being conducted in a criminal case (e.g., undercover operations,
surveillance, search warrants) are completed.
Limitations on Communications. At all times during coordination
communications and document reviews, attorneys and agents should take
care to abide by limitations on the disclosure of information.
Prohibited disclosures do or may include: matters occurring before a
grand jury under Federal Rule of Criminal Procedure 6(e); tax returns
or return information under the Internal Revenue Code, 26 U.S.C. §
6103; information obtained under certain foreign treaties; and matters
that have been sealed by the court (e.g., search warrant
affidavits). See Sections V-VII, infra.
IV. Information Sharing
Taking into account the overriding requirement that civil and criminal
processes be used for proper purposes and other disclosure constraints,
information obtained as the result of legitimate civil or criminal
investigations or proceedings may be shared between criminal and civil
agents and attorneys. To maximize appropriate sharing, attorneys should
consider developing as much evidence as possible before the grand jury is
used. For example, witness interviews, undercover operations, surveillance,
trash runs, and publicly available information usually may be used to
develop evidence in a criminal case prior to the use of the grand jury. In
turn, grand jury limitations on the disclosure of such evidence would not
come into play.
V. Grand Jury Information
Federal Rule of Criminal Procedure 6(e) prohibits the disclosure of
"matters occurring before the grand jury" to civil agents and attorneys,
unless an express exception is applicable and, in some instances, a court
order is obtained. Information which is not deemed to be "matters
occurring before the grand jury" may be disclosed.
There are two types of disclosures to civil attorneys and agents that
may arise during parallel proceedings: 1) limited consultation
disclosures made for purposes of furthering and protecting the
criminal grand jury proceeding through appropriate coordination when there
are parallel cases; and 2) substantive use disclosuresmade for
the purpose of using grand jury information in a parallel civil proceeding.
Two exceptions under Rule 6(e) apply to these two types of disclosures. The
exception applicable to first typedisclosures in furtherance of the
criminal caseis found in Rule 6(e)(3)(A)(i) and (ii); the exception
applicable to the second type of disclosuresubstantive civil
useis found in Rule 6(e)(3)(C).
Consultation Disclosures
Rule 6(e)(3)(A) provides for disclosures of grand jury matters to
government attorneys.
Rule 6(e)(3)(A)(i) permits disclosure of grand jury matters to a
government attorney for the performance of his or her duty in enforcing the
criminal law or assisting the grand jury. Rule 6(e)(3)(A)(ii) permits grand
jury matters to be disclosed as is necessary for an attorney to perform his
duty to enforce the criminal law. Under these sub-sections, an attorney
handling the criminal case may disclose limited grand jury matters to a DOJ
attorney who is handling a parallel civil proceeding for consultation
purposesin order to insure that actions taken by civil attorneys
and/or personnel are not inconsistent with and do not adversely affect the
criminal investigation and prosecution. See USAM 9-11.250 and
Criminal Resource Manual 156.
Because the issue of disclosures of grand jury matters to civil
attorneys and agents for coordination purposes has not been decided by the
courts, attorneys should proceed with care. Thus, when there are
parallel cases, attorneys should take care to disclose only such limited
information under Rule 6(e)(3)(A), as is necessary for purposes of
protecting and furthering the criminal grand jury proceeding through
appropriate coordination of the parallel proceedings. In this regard,
disclosures, to the extent necessary, should be narrowly tailored to effect
coordination. Further, while disclosures under Rule 6(e)(3)(A) are properly
made for the limited purpose of protecting and furthering the
criminal case, it is best practice to avoid or limit the disclosures of
grand jury matters whenever possible. Practically speaking, this may mean
that civil attorneys and agents will provide most of the information about
the theories of their cases, expected investigative steps, potential
witnesses and exhibits, etc., while criminal attorneys and agents will
evaluate that information and then provide only limited and necessary
information about the criminal case.
Disclosures for Civil Use
Civil attorneys and agents are not automatically entitled to disclosure
of grand jury matters for use in their civil proceedings. When disclosure
of information that is deemed to constitute matters occurring before the
grand jury is sought for purposes of using the information in the civil
matter, a court order permitting such disclosure must first be obtained. A
court will permit disclosure under these circumstances only if the
government meets the exception requirements set forth in Rule
6(e)(3)(C)(i)(I): that the disclosure is "preliminarily to or in
connection with a judicial proceeding...." and a showing of "particularized
need" for the requested material has been made.
VI. Search Warrant Materials
A search warrant is one method of obtaining evidence necessary for the
criminal case. Courts have approved the sharing search of warrant
information with attorneys and agents handling a parallel civil matter,
absent a showing of bad faith, an abuse of process or grand jury disclosure
limitations.
Attorneys also should consider whether materials obtained through a
search may be deemed by a court to have been obtained through the grand jury
processfor example, in situations where search warrants are executed
during a grand jury investigation or after evidence has been presented to
the grand jury.
Additionally, even if materials seized pursuant to a properly issued
warrant may be shared with civil attorneys and agents, the warrant affidavit
may or may not be appropriately shared. This is so if the affidavit has
been sealed or if it contains grand jury matters or other information which
cannot be disclosed to or used by civil attorneys or agents.
Finally, in situations where the civil proceeding goes forward before
the criminal proceeding and search warrant information is used in the civil
proceeding, a defendant may seek to unseal a search warrant affidavit in
order to challenge the constitutionality of the search and admissibility of
evidence in the civil proceeding. In such cases, the government may argue
that a challenge to the search warrant is not appropriate in the civil
proceeding because the exclusionary rule does not apply there.
VII. Section 6103 Disclosures
Section 6103 (26 U.S.C.) protects all returns and return information
collected or gathered by the IRS from unauthorized disclosure. These
disclosure provisions are not an impediment to the government's ability to
use parallel proceedings for effective enforcement of the tax laws.
Under Section 6103 (h)(3), the IRS is permitted to disclose returns and
return information to DOJ if the IRS has referred a matter of tax
administration to DOJ under Section 6103(h)(2). Further, disclosures
within the DOJ must be made in accordance with 26 U.S.C. Section 6103(h) and
Treasury Regulation 26 C.F.R. Section 6103(h)(2)-1(a) and (b).
DOJ attorneys (e.g., Tax Division Criminal Section Attorneys and
Assistant United States Attorneys) who are assigned to handle a criminal
matter referred by the IRS (e.g., for prosecution) may disclose
returns and return information to seek information from, or confer with,
DOJ Civil Section attorneys and employees in connection with the handling of
the criminal case or for purposes of coordinating civil and criminal
matters.
VIII. Misuse of Power or Constitutional Violations
While courts have approved parallel proceedings, they also have
recognized that multiple actions against individuals have the potential for
abuse. An often-cited case in this area is United States v. Tweel,
550 F.2d 297 (5th Cir. 1977). There, the Fifth Circuit reversed a
conviction, finding that evidence elicited from a defendant during a civil
audit should be suppressed because the taxpayer's consent was obtained by
literally true but "sneaky" and "shocking" assurance by an IRS revenue agent
that no "special agent" was involved. According to the court, this created
the mis-impression that the inquiry was for a civil, and not a criminal,
matter. The Fifth Circuit held that a defendant's consent to a search
(during a civil audit or other proceeding) will be deemed invalid if it is
induced by deceit, trickery, or misrepresentation about the nature of the
inquiry.
Since the Tweel decision, most courts that have considered so-
called Tweel violations, have concluded that the government agents
had not made affirmative misrepresentations constituting fraud,
trickery, and deceit, even where they had failed to warn the taxpayers of a
possible or ongoing criminal prosecutions." In two recent cases involving
the SEC, defendants have successfully argued that the government abused its
power and violated the defendants' due process rights by allegedly using
civil proceedings to gather evidence for a criminal prosecution. See
United States v. Stringer, 408 F.Supp.2d 1083 (D. Or. 2006); United
States v. Scrushy , 366 F. Supp.2d 1134 (N.D. Ala. 2005). In those
cases, the courts were convinced that the government had improperly used
civil process to develop evidence for the criminal cases and, in so doing,
had violated the defendants' constitutional rights and/or departed from the
proper administration of justice. Under those circumstances, both courts
opined that the government was obligated, but failed, to inform the
defendants of the specific criminal investigations that were ongoing. They
concluded that the standard warnings given by the SEC attorneys to the
defendantsinforming them that the government could use the information
in any criminal proceedingdid not suffice. Based on the government's
conduct, the courts sanctioned the government by suppressing the defendant's
deposition testimony (Scrushy) or dismissing the indictment
(Stringer).
Such claims of having been manipulated or misled by the government also
have resulted in the dismissal of an indictment, under circumstances where
the government has made false promises to the detriment of the criminal
defendants. See, e.g., United States v. Rodman, 519 F.2d
1058, 1059 (1st Cir. 1975) (indictment dismissed where subject of SEC
investigation was induced to cooperate based on representation that SEC
would make a strong recommendation against criminal prosecution and no such
recommendation was made); United States v. Rand, 308 F. Supp. 1231,
1235 (N.D. Ohio 1970) (criminal case dismissed where it was based on
testimony of subject at SEC trial induced by representation that there would
be no criminal prosecution).
In short, while conducting parallel proceedings, attorneys and agents
must take care not to affirmatively mislead targets about a criminal
prosecution in order to obtain information from them, nor use a civil or
administrative proceeding as a stalking horse to develop evidence for the
criminal case.
IX. Criminal Discovery and Disclosure Obligations
The government has certain discovery obligations in criminal proceedings
(e.g., Fed.R.Crim.P 16, Brady v. Maryland, Giglio v. United
States, and the Jencks Act,). To meet those obligations, prosecutors
should be sure to obtain information known to agents and attorneys who are
working on parallel civil matters, including the statements of defendants
and witnesses and exculpatory evidence that may be contained in civil and
administrative case files.
X. Civil Discovery and Trial Disclosures
At times, a civil proceeding will go forward before the criminal
investigation is completed and an indictment is sought. This is
particularly true when the government pursues civil injunctions. Given the
likely timing of these proceedings, attorneys and agents should consider the
impact of civil discovery on the criminal investigation and prosecution.
Discovery under the Federal Rules of Civil Procedure is permitted
earlier in the proceedings and is broader than the discovery permitted under
the Federal Rules of Criminal Procedure. Initial disclosures of documents
that a party "may use to support its claims or defenses" are required under
Rule 26(a)(1) of the Federal Rules of Civil Procedure. Further, criminal
defendants may attempt to use the liberal civil discovery rules to learn
information about the government's criminal case that they would not
otherwise obtain or that they would ordinarily not obtain until closer to
trial.
There are several ways for the government to meet its civil discovery
obligations while protecting the criminal case. First, if the government
does not plan to use information in criminal investigative files, that
information need not be provided in the Rule 26(a)(1) initial disclosures,
because initial disclosures under Rule 26(a)(1) of the Federal Rules of
Civil Procedure are limited to information that the disclosing party "may
use to support its claims or defenses." Second, if necessary, the government
can petition the civil court to limit the defendant's discovery in the civil
case in order to prevent a criminal defendant from circumventing limitations
on discovery in criminal cases. This is done by moving for a Rule 26 ( c)
protective order limiting the scope of discovery in the civil case. Third,
if the court is unwilling to enter a protective order, the government could
seek a stay of the civil action pending resolution of the criminal case.
Finally, as a last recourse, the government can seek to dismiss the civil
case without prejudice. This is appropriate only where it is clear that:
(1) turning over information from the criminal investigation in civil
discovery will substantially prejudice the criminal case, and (2) criminal
prosecution is more important than obtaining the injunction or other civil
relief.
In addition to the issues raised by discovery in the civil proceeding,
the government will be disclosing information in preparation for hearings in
the civil proceedings. Disclosure of the government's evidence may result
in the defendant's attempting to contact or intimidate witnesses, or
attempting to destroy or manufacture evidence. Further, at least some of the
government's theories and evidence will be disclosed to a defendant before
he or she proceeds to the criminal trial. Moreover, if the information
developed in a civil injunction case is similar to information contained in
a sealed affidavit for a search warrant, the government's reasons for
sealing the search warrant may be eliminated.
Notwithstanding the possibility that some of the government's
criminal case may be disclosed earlier than would otherwise occur were there
no parallel civil proceeding, the benefits to the government are likely to
outweigh the possible harm to the criminal case. Promoters and preparers
will be enjoined. Customers and clients will be put on notice and may be
more inclined to cooperate with the government once a court has enjoined the
abusive activity. The government will not lose significant assets and will
be able to recover revenues.
XI. Conclusion
Parallel proceedings present additional challenges and potential
benefits and risks to consider. Yet, the benefits gained by comprehensive
efforts to punish and deter wrongdoers through effective criminal
prosecutions, civil monetary recoveries, and injunctions are well worth the
extra efforts made and any additional risks incurred.
[added September 2007]
[cited in USAM 6-4.400]
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