The opinion of the court was delivered by: Hon. Jerome B. Simandle
This matter is before the Court on reconsideration of the Court's December 12, 2011 opinion and order denying the defendant's motion to suppress evidence gathered as a direct or indirect result of the IRS' November 30, 2006 interview of the defendant during a civil audit. [Docket Item 25.] The court heard oral argument and conducted a formal suppression hearing where two witnesses testified on February 22 and 29, 2012. The principal issue to be decided is whether statements made by the accused during the course of a civil tax audit conducted by an IRS revenue agent should be suppressed because they were allegedly sought by the IRS at a point in time when the IRS already had "firm indications of fraud" and therefore should have referred the investigation to the criminal investigation division. For the reasons discussed herein, on reconsideration the court concludes that its original decision denying the defendant's motion to suppress was correct and therefore, the court will again the deny the defendant's motion to suppress.
Defendant George Dilworth is presently indicted on three separate charges. Count I of the Indictment charges the defendant with conspiracy to evade taxes in violation of 18 U.S.C. § 371. Specifically, Count I alleges defendant, along with co-conspirators Luciano DiSalvatore, Michael Schaffer and Anthony Sentore, conspired to conceal taxable income from the IRS by falsely and fraudulently characterizing as "loans" payments from Dilworth and DiSalvatore to Sentore and Schaffer for Sentore and Schaffer's business interest in Municipal Code Inspections, Inc. (hereinafter "MCI"), which constituted taxable income to Sentore and Schaffer. [Docket Item 29.]
Counts II and III of the Indictment charge the defendant with making false statements to IRS agents in violation of 18 U.S.C. § 1001. Count II of the Indictment alleges defendant falsely claimed on November 30, 2006, that the payments to co-conspirators Anthony Sentore and Michael Schaffer were loans from MCI. Count III of the Indictment alleges defendant falsely claimed that the payments to co-conspirators Anthony Sentore and Michael Schaffer were loans from MCI on March 9, 2007. [Docket Item 29.]
The defendant moved to suppress evidence gathered as a direct or indirect result of the IRS' November 30, 2006 interview with the defendant, wherein the defendant allegedly made the false statement which is the basis of Count II of the indictment. During the interview, the defendant told Revenue Agent Elmore Phillips that the two six figure transactions between defendant and Di Salvatore to Sentore and Schaffer were in fact loans, not payments for Sentore and Schaffer's business interest in MCI, and therefore not reportable taxable income by Sentore and Schaffer. The defendant argued that IRS Revenue Agent Elmore Phillips had firm indications of fraud prior to the November 30, 2006 interview and did not refer the case to the Criminal Investigation Division (hereinafter "CID") as required by IRS regulations. Instead, Agent Phillips conducted a civil audit interview on November 30, 2006 and did not inform the defendant at the time of the interview that there were indications of criminal fraud. Consequently, the defendant argued that this interview exceeded the scope of any consent given by the defendant and constituted an unreasonable search in violation of the Fourth Amendment.
The Court held in its December 12, 2011 opinion that the IRS did not have firm indications of fraud prior to the November 30, 2006 interview and did not violate the Fourth Amendment by continuing to conduct the civil audit at that time. First, the court noted that there was no evidence of deception on the part of the IRS agents during the November 30, 2006 interview. Specifically, Revenue Agent Phillips did not tell the defendant the meeting was strictly civil or affirmatively misrepresent the purpose of the meeting. The Revenue Agent also told Dilworth the purpose of the November 30 meeting was to gather information on how MCI worked as a corporation. The Court reasoned that questions about the defendant's ownership interest in MCI and the two questionable transactions were properly within the scope of this meeting.
In addition, the Court explained that after this meeting, the case was referred to CID for a criminal investigation. Importantly, the court noted that there was no evidence of CID involvement prior to the referral to CID after the November 30, 2006 meeting.
The Court found that the mere failure of the Revenue Agent to give the defendant notice that the November 30, 2006 investigation, which was part of a months-long civil audit, may result in criminal charges does not by itself constitute fraud, deceit and trickery. See United States v. Tweel, 550 F.2d at 299. Therefore, the court held that the November 30, 2006 interview was not an unconstitutional search and suppression was not warranted.
The defendant filed a motion for reconsideration of the court's denial of his suppression motion. In granting reconsideration and concluding that a formal suppression hearing was necessary, the Court found that several important items of evidence submitted in connection with the defendant's original motion were not sufficiently considered by the Court.*fn1
Further, the court recognized that this civil audit was given a status level 17 for fraud awareness at its inception in June, 2006. A status of 18 would require a transfer to CID. After assigning Defendant's case to level 17, the IRS collected and reviewed numerous documents in connection with the defendant and the corporation, Municipal Code Inspections. (Def.'s Ex. C.) Revenue Agent Larado even visited the corporation's headquarters and conducted a field investigation. (Def.'s Ex. C.) In addition, Revenue Agent Phillips also reviewed numerous documents submitted by the defendant and interviewed the defendant's Power of Attorney. (Def.'s Ex. J.) All of this occurred prior to the November 30, 2006 meeting with the Defendant. The Revenue Agent also met regularly with the Fraud Technical Advisor over this five month period of time. However, the status of Defendant's case remained 17 despite all of the additional information gathered by the IRS agents.
When this five month document review and field investigation period was viewed in conjunction with the scheduling on November 28, 2006, of the December 11, 2006 meeting to discuss referral to the CID prior to the defendant's interview on November 30, 2006, the Court found that there was an issue as to whether firm indications of fraud were developed prior to the Defendant's interview and whether the CID referral was purposefully delayed until after the interview took place. Further, the IRS Fraud Technical Advisor Mark Gerwald was significantly involved in the Defendant's case from June 2006 onward and the role of the Fraud Technical Advisor as an intermediary position between the Civil Division and the Criminal Division of the IRS was unclear from the record.
The Court determined that a formal hearing was necessary to determine whether firm indications of fraud existed prior to the November 30, 2006 meeting. In particular, the Court concluded that the testimony of Revenue Agent Elmore Phillips and Fraud Technical Advisor Mark Gerwald was necessary in determining the merits of the defendant's suppression motion, even though neither Defendant Dilworth or the Government had suggested the need for such testimony at the initial suppression hearing in 2011.
The Court then conducted the suppression hearing where extensive testimony was taken from Mr. Phillips and Mr. Gerwald over two days. The Court then reserved decision and has fully reviewed the record before it.