A civil fraud suit recently filed against Roger Stone, a longtime adviser to former President Donald Trump, raises multiple questions that demand answers as tax filing season heats up. The suit, authorized and requested by the Internal Revenue Service (IRS) and commenced by the Justice Department, outlines a tax due and owing of nearly $2 million and references tax shenanigans taking place between 2007 and 2011, as well as various overt acts to deceive the IRS and to evade payment of his taxes in 2018, during the Trump administration.
If Stone loses the case, he’ll likely lose his condo, probably declare bankruptcy, and have to pay up his delinquent taxes. But, where is the punishment for him? Why is he not being criminally prosecuted for tax evasion? If the U.S. government is reluctant to pursue criminal prosecution, then why not assert the Civil Fraud Penalty on Stone, which could amount to as much as $1.5 million in addition to the $2 million he owes?
The government’s apparent craven approach to enforcing the law when it comes to Stone appears to be continuing, even under the Biden administration, but it doesn’t have to be that way.
In July 2020, Trump memorably commuted the sentence of his longtime friend and former campaign adviser with regard to seven felony crimes that he had been convicted of and sentenced to 40 months in prison. Stone’s felonies were associated with his efforts to deceive Congress and made no reference to his tax problems. Former U.S. Attorney Barbara McQuade told me that Trump’s commutation would not apply to any of Stone’s tax problems.
Republican Senator Mitt Romney unforgettably described the Stone commutation as “unprecedented, historic corruption.” Four career DOJ prosecutors recommended at the time that Stone be sentenced to seven to nine years in prison. After Trump attacked their recommendation on Twitter, then-Attorney General Bill Barr overruled it. The prosecutors withdrew from the case in protest and one quit the Justice Department completely. The presiding judge in the Stone matter, Amy Berman Jackson, suggested that the president had tried to influence the course of justice by publicly attacking her, the jurors, and the Justice Department lawyers.
Judge Jackson’s suggestion reverberates again today in light of the recent civil suit filed by DOJ against Stone when the option of criminal prosecution is clearly available. Has DOJ been permanently cowed by the Trump twitter tantrum referenced above? Is DOJ pulling their punches at the direction of the IRS Chief Counsel’s office and not using their entire arsenal against Stone?
Maybe the IRS thought using the “handle with kid gloves” civil approach would be the most efficient use of IRS resources in “protecting the revenue.” But by not pursuing the Stones with the threat of sending them to jail for their intentional efforts to “defraud” Uncle Sam, the IRS and DOJ may be unintentionally reinforcing the message that “only the little people pay taxes.” If you are a friend of Trump’s, or otherwise have political or wealth connections, you seemingly can escape the full force of the law.
If the IRS Chief Counsel’s office just wanted to take the easy way out and put the Stone saga in the rear view mirror, so to speak, and not deal with the political drama, then why not at least make use of the strongest penalty in the IRS Civil toolbox – the Civil Fraud penalty?
Without going too deep into the tax weeds here, a short examination of the Tax Crimes Handbook authored by the IRS Chief Counsel’s office, the same office that directed the civil complaint against Stone, is informative when it comes to outlining the basic criteria needed to criminally prosecute Title 26 Section 7201 Evasion of Payment tax crimes.
Elements of the Offense:
- an attempt to evade or defeat the payment of a tax – check
- An additional tax due and owing – check
- Willfulness – check
A short review of the civil complaint filed against Stone reflects the fact that the evidence accumulated by the government against Stone with regard to his attempts to evade payment of his taxes more than meets the above criteria for successful criminal prosecution.
The Tax Crimes Handbook fleshes out the attempt to evade payment element by noting the need to prove affirmative acts of evasion almost always involve some form of concealment of money or assets with which the tax could be paid or the removal of assets from the reach of the IRS.
Evasion: The civil complaint outlines how Stone and his wife, Nydia, used what is known as an “alter-ego” company, an entity that is legally distinct from the taxpayer, but essentially inseparable in terms of assets. The Stones’ company was a Delaware limited liability company called Drake Ventures, and it was used to conceal their financial transactions from the IRS. Bank accounts were established by members of the Stone family in the name of the alter-ego company. Further, they established a trust to facilitate the purchase of a residence in the name of the trust as opposed to that of the Stones.
Additional Tax Due: The civil complaint clearly delineates almost $2 million that the Stones owe the U.S. government. Stone had in fact been making installment tax payments that abruptly stopped with the commencement of Special Counsel Robert Mueller’s investigation into Russian interference in the election and any role played by the Trump campaign. Stone does not dispute he owes taxes.
Willfulness: Conduct from which the willful evasion of payment can be inferred includes conduct designed to place assets beyond the government’s reach after a tax liability has been assessed.
Clearly, the Stones’ use of an alter-ego LLC and alter-ego bank accounts speak to this criteria. Additionally, the evidence reflects that a trust was constructed for the sole purpose of purchasing a condominium and concealing this action from the IRS, or, at the very least deceiving the IRS in the procurement of an expensive asset via the trust, when, in fact, the Stones owed millions in taxes.
It’s possible to play devil’s advocate here and suggest that the government may have thought that it could not meet the criminal law burden of providing enough evidence that proves the Stones’ guilt beyond a reasonable doubt.
However, such a scenario seems implausible because the same evidence being used in the civil complaint — which is mainly documentary, which doesn’t risk changing unlike testimonial evidence — more than meets the threshold for a criminal case. This can be seen particularly in the key, and sometimes tricky, area of intent. The documents clearly reflect the Stones’ affirmative acts in intentionally concealing from the IRS their financial transactions through the use of an LLC and related bank accounts. Even more probative and, dare we say “damming,” of the Stones’ intent to defraud the IRS, is the concoction of a trust to hide the purchase of a Florida condo instead of using the money to pay their tax bill.
It’s fair to say the Stones could easily be prosecuted for criminal tax fraud yet the IRS chief counsel seemingly ignored that part of their own Tax Crimes Handbook and directed DOJ to implement a civil suit instead. While one can cavil with the exercise of this option, the fact that no civil fraud penalty was asserted against the Stones, in the face of an abundance of evidence of them intentionally attempting to defraud the IRS, is highly questionable.
The civil fraud penalty exists for circumstances and fact patterns just like the Stones’. This penalty which goes up to 75 percent of the tax due and owing, is the most powerful arrow in the IRS civil quiver. Assertion of a civil fraud penalty of almost $1.5 million could hit the Stones in the wallet and provide a deterrent to future tax shenanigans on their part, but also provide an object lesson to American taxpayers who might now be tempted to set up their own alter-ego companies and trusts to evade tax payments — given that the Stones seem to be escaping both serious criminal and civil penalties.
The IRS publishes a Civil Fraud Handbook which is linked here to assist the reader in understanding just what the criteria is for assertion of the civil fraud penalty. The reader will note how similar the criteria is with that of the Tax Crimes Handbook for criminal prosecutions.
Civil fraud penalties will be asserted when there is clear and convincing evidence to prove that some part of the underpayment of tax was due to fraud. Such evidence must show the taxpayer’s intent to evade the assessment of taxes which the taxpayer believed to be owing.
Clearly, the Stones’ use of dirty tax tricks (an alter-ego LLC and a trust to conceal and deceive the IRS) more than meets the criteria. Why don’t DOJ and the IRS Chief Counsel’s office recognize this and follow their own guidelines in enforcing the tax code?
Multiple attempts to obtain comment from DOJ and the IRS were unsuccessful. A media relations contact from the IRS did make the definitive statement that the law does not allow any comment with regard to individual taxpayer cases. So, the IRS is hamstrung from providing any extenuating circumstances that apply to the Stones’ tax dodge and might also explain their less than dynamic approach to penalizing the Stones’ tax fraud.
To be fair, perhaps the IRS took the extremely narrow “protect the revenue” approach in terms of ensuring that the Stones’ assets would redound to the IRS and go toward paying off the outstanding taxes. But that isn’t using the most powerful tools in the IRS arsenal, which have previously been employed against folks like Al Capone and Leona Helmsley. With this more timid approach, who is being deterred into voluntarily complying with the tax code?
President Joe Biden’s speech to Congress outlining his priorities was notable in its emphasis on cracking down on millionaire and billionaire tax cheats. While Stone does not likely qualify in terms of his overall wealth — his politically entitled status as a “friend of Trump,” who pardoned and lauded him for past criminal activities — might provide an excellent vehicle for Biden to demonstrate he is serious about cracking down on tax cheats by pursuing Stone with criminal prosecution and a jail term for his nefarious tax evasion instead of just taking away his fancy condo.
Perception of the fairness of enforcement of the tax code is fundamental to the efficacy of the voluntary tax compliance that is the bedrock of the U.S. tax system. When the government shies away from using the deterrent tools available to them to the fullest extent then voluntary compliance with the tax code erodes.
Roger Stone doesn’t care. But the average American taxpayers should.
Image: Roger Stone, former adviser and confidante to U.S. President Donald Trump, leaves the Federal District Court for the District of Columbia after being sentenced February 20, 2020 in Washington, DC. Photo by Chip Somodevilla/Getty Images