Crime and Re-Punishment: Can IRS Penalize After a Criminal Case?

If you’ve ever watched a crime drama on television, you know that a criminal defendant can’t be tried twice for the same charge: That’s double jeopardy. The key to double jeopardy is found in the Fifth Amendment, which states that no person shall “be subject for the same offense to be twice put in jeopardy of life or limb.”

In other words, the government doesn’t get two bites of the apple.

That’s also true in civil matters. A related principle called collateral estoppel provides that when a valid and final judgment has determined an issue of ultimate fact, that issue can’t be re-litigated between the same parties in a future lawsuit. Collateral estoppel is typically associated with civil matters but has been established as a rule of federal criminal law since it was raised in the 1916 Supreme Court Case United States v. Oppenheimer.

But what happens when the two intersect? Is it possible for the same parties to litigate a matter in civil court that’s already been resolved in criminal court? That’s one of the issues raised in a recent Tax Court case.

In the case, married taxpayers Dung Le and Nghia Tran owned and operated nail salons. They didn’t correctly report their income every year. That caught up with them: On March 20, 2013, Le was indicted on three counts of attempting to evade and defeat tax under Section 7201 for the tax years 2004, 2005, and 2006.

Months later, Le pleaded guilty to Count I of the indictment, agreeing that he willfully attempted to evade or defeat tax for 2006. He also agreed to pay restitution of $33,332 to the Internal Revenue Service. As a result of his plea agreement, the remaining counts were dismissed.

Business Income to Personal Accounts

For the years in the indictment, Le and Tran had four bank accounts at Union Bank & Trust Co. The accounts included two business checking accounts, a joint personal checking account, and a personal savings account.

According to court documents, in 2004, 2005, and 2006, Le diverted large amounts of business income from the salons to his personal savings account. An investigation found that Le deposited a total of $219,955.69 into that account from customer checks and cash; that compares with $306,699.08 deposited to the business accounts during those years. Sometimes, Le took money back from the business deposits in the same transactions.

His behavior didn’t go unnoticed. On Sept. 8, 2004, Union Bank issued a Suspicious Activity Report (SAR). Under the Bank Secrecy Act, banks must keep records and file reports of suspected money laundering and fraud. Additionally, banks are required to report to the Treasury any transactions (cash deposits or withdrawals) that total more than $10,000 in a single day.

One of the ways to get around the law is to break down large transactions into smaller ones—that’s called structuring. Making cash deposits of less than $10,000 isn’t illegal; it only violates the law when the transactions are structured “for the purpose of evading” the reporting requirements. And that’s what the bank, and the feds, believed Le was doing.

Le also regularly had customers make out checks to him personally. In August of 2004, the bank sent Le a letter suggesting that he was operating his nail salon businesses from his personal savings account; they also provided him with a copy of the SAR. The letter apparently didn’t concern Le, and his behavior continued.

In 2007, the IRS began examining the couple’s 2004, 2005, and 2006 tax returns. Le and Tran had reported business income that they deposited in their business checking accounts but not in their personal accounts. The IRS disallowed several business deductions and challenged the amounts of income reported. When asked for documentation, Le altered checks and provided false information.

Referral to CI Division

Eventually, the IRS referred the case to the Criminal Investigation Division, which resulted in Le’s indictment.

Separately, on Nov. 3, 2015, the IRS issued notices of deficiency for 2004, 2005, and 2006. Le and Tran argued several points regarding the notices. Le also averred that the doctrine of collateral estoppel barred the IRS from re-litigating his tax liability for 2006, suggesting that the liability had already been determined in the criminal restitution order.

It’s true that the restitution took into account business checks deposited into personal accounts but didn’t include any cash. While Le was credited for the restitution payment, he had not paid additional tax on cash deposits, nor any disallowed deductions. He argued, however, that it was too late for the IRS to assess additional tax or penalty because he had already conceded liability as part of his plea.

The court noted that collateral estoppel applies when five facts are true:

• the party involved in the second suit was a party, or privy to a party, in the previous suit;
• the issue in the second suit is the same as the one involved in the previous action;
• the issue was “actually litigated” in the prior action;
• a valid and final judgment determined the issue; and
• the determination for the previous action was “essential to the prior judgment” Anderson v. Genuine Parts Co.

The court found that the criteria weren’t all met. An order for criminal restitution isn’t essential to the judgment of conviction against a criminal defendant, the court ruled, “because it * * * [is] not an element of the crime of conviction” Hickman v. Commissioner.

The court emphasized that culpability is separate from restitution since “the district judge enjoy[s] considerable discretion as to whether he should order restitution, Hickman v. Commissioner, 183 F.3d 535, 538 (6th Cir. 1999), and if so, as to the amount.”

Finally, the court said “it is well settled” that restitution doesn’t affect the IRS’ authority to determine, assess, and collect a civil liability. See Morse v. Commissioner.

Finding that collateral estoppel didn’t bar the assessment of the tax liabilities, the court proceeded to examine each of the issues relating to unreported income, overstated deductions, and penalties. The result was favorable to the IRS on almost every point.

The case is Le v. Commissioner, T.C., 2108-16, 2/26/20.

This is a weekly column from Kelly Phillips Erb, the TaxGirl. Erb offers commentary on the latest in tax news, tax law, and tax policy. Look for Erb’s column every week from Bloomberg Tax and follow her on Twitter at @taxgirl.