Originally published by Jack Townsend.
In United States v. Keleta, ___ F.3d ___, 2020 U.S. App. LEXIS 3566 (8th Cir. 2020), here, the court sustained Keleta’s conviction for “conspiring to defraud the United States and willfully aiding and assisting in the filing of a false tax return” but remanded for resentencing. This case seems to be a garden variety case of tax preparer fraud. The issues on appeal were: (i) whether the trial court erred in denying a motion to suppress evidence seized by search warrant; (ii) whether the prosecutor committed misconduct in certain statements before the jury; and (iii) whether the trial court erred in applying a four-level enhancement under S.G. § 3B1.1(a) as organizer or leader of a criminal activity involving five or more participants. Issues (ii) and (iii) are fairly routine (although issue (ii) is likely a one-off occurrence, unlikely to appear in future trials). I will address only issue (i)
The motion to suppress was based on a search warrant. Here are key excerpts for issue (i) (Slip Op. 2-3, 7-8):
Asmerom “Ace” Keleta owned Eriace Enterprise, LLC (Eriace), which operated several tax-preparation businesses in the St. Louis metropolitan area under the names U-City Tax Service and Ace Express Tax Service. In 2012, the IRS’s Scheme Development Center (SDC) forwarded information about Eriace to the IRS’s Criminal Investigation Division. After reviewing the information, investigators noted that a high percentage of tax returns prepared by Eriace claimed certain tax credits. They also found that much of the information used to seek these tax credits “was not verifiable by other information filed with the IRS” and that the unverifiable information was often combined with verifiable information in ways that made the taxpayer eligible for the maximum or near the maximum available tax credit. The personal tax returns for Keleta and U-City Tax Service employees Miyoshi Lewis and Teklom “Tek” Paulos fit this pattern.
On February 27, 2013, IRS Special Agent Danette Coleman conducted an undercover operation at a U-City Tax Service branch in University City, Missouri. Lewis prepared a tax return for Coleman while Paulos helped another customer. Keleta was not present at the time. Lewis initially calculated a refund amount of $44 based on the information Coleman provided. When Coleman asked why the refund was so low, Lewis responded that she could “make it more, but the fee will go up.” Lewis then entered false information and calculated a refund of approximately $4,200. She charged Coleman $500 cash for obtaining this increased refund.
The IRS also received three anonymous letters alleging tax fraud at that U-City Tax Service branch. The anonymous informant claimed that Keleta had sold the use of his preparer tax identification number (PTIN) and electronic filing identification [*3] number (EFIN) to several individuals, including Paulos, who used them to file tax returns containing fraudulent information. The IRS corroborated that Lewis, Paulos, and several other individuals named in the letters were “friends” on Facebook. The IRS also found that numerous withdrawals from Eriace’s business checking account appeared to be personal in nature.
Based on this information, IRS Special Agent Nicholas Kenney obtained a warrant to search the U-City Tax Service branch and seize records found on the premises. The government executed the warrant on April 13, 2013. It seized computers, cell phones, client files, and other items, including a signature stamp with Keleta’s signature.
The district court denied Keleta’s motion to suppress the evidence seized at the U-City Tax Service branch. It concluded that there was probable cause to issue the warrant and, even if there was not, the good-faith exception to the exclusionary rule applied. See United States v. Leon, 468 U.S. 897, 926 (1984).
Keleta argues that false statements in Special Agent Kenney’s warrant affidavit misled the issuing magistrate judge into believing that there was probable cause to search the U-City Tax Service branch. In particular, Keleta notes that: (1) a chart in the affidavit contained mathematical errors; n2 and (2) the SDC did not expressly find that Eriace’s tax returns were “suspicious,” as the affidavit indicated. He also asserts that the affidavit did not provide context for Kenney’s claim that an unusually high percentage of Eriace’s tax returns claimed certain tax credits. Because the statements were made in “reckless disregard of the truth,” Keleta argues, the good-faith exception does not apply. Leon, 468 U.S. at 923. And he contends that, without the misleading statements in the affidavit and without the proper context, there was not probable cause to issue the search warrant.
n2 Special Agent Kenney’s affidavit stated that, for tax year 2011, 86% of Eriace’s tax returns claimed an Earned Income Credit (EIC), 89% claimed Schedule C income, 11% claimed household help income, and 56% claimed the maximum EIC. In fact, 77% of Eriace’s tax returns claimed EIC, 51% claimed Schedule C income, 14% claimed household help income, and 51% claimed the maximum EIC. Kenney noticed the errors before the suppression hearing and notified the lead prosecutor, who, in turn, notified the defense and the court. At the hearing, Kenney testified that the errors did not affect his assessment that the returns were suspicious.
The Eighth Circuit panel assumed, solely for purposes of addressing the argument, “that the warrant affidavit contained false statements that were made ‘out of reckless disregard for the truth.’” (Slip Op. 9; the Eighth Circuit did footnote (fn. 3), however, that the agent subscribing the warrant affidavit had testified that he believed the affidavit true and accurate and “there was ‘no evidence that would support a finding that Agent Kenn[e]y was being dishonest or acted with reckless disregard for the truth’ when he made the disputed statements.”) On that assumption (perhaps contrary to fact), the Court found that there were ample other circumstances recounted in the affidavit to support the warrant. The Court said (Slip Op. 11):
An affidavit in support of a search warrant must provide sufficient information for a magistrate judge to assess whether there is a “fair probability” that evidence of a crime will be found at the location to be searched. Gates, 462 U.S. at 238–39. When an affidavit relies on statistical information, it may be necessary to provide context for the magistrate judge to understand whether the data is indicative of unlawful activity. See, e.g., United States v. Singh, 973 F. Supp. 7, 11 (D.D.C. 1997). Here, the affidavit provided a detailed description of the unusual pattern of returns prepared by Eriace and the undercover transaction with Lewis. Even without the statements that Keleta disputes, this provided sufficient context for the issuing magistrate judge to evaluate whether there was a fair probability that evidence of illegal activity would be found at this particular U-City Tax Service branch. And the record supports the magistrate judge’s conclusion that, “taken together,” the circumstances described in the affidavit were sufficient to establish probable cause.
JAT Comments:
1. Since I have not previously mentioned the Scheme Development Center (“SDC”) referred to in the opinion, I thought I would briefly discuss the SDC. The SDC, its mission and general processes are identified in the IRM at Part 9 (Criminal Investigation), Chapter 8 (Scheme Development), Section 1 (Scheme Development Center), here. Here are some introductory excerpts:
9.8.1.2.1 (08-02-2011)
Mission Statement
To support the CI mission by identifying and developing schemes for the purpose of referring and supporting high-impact criminal tax and related financial investigations. This mission will be achieved through the use of human and artificial intelligence and via collaboration with stakeholders.
9.8.1.2.2 (10-29-2019)
Functional Responsibilities(1) The primary function of the SDC is to identify and develop schemes for the purpose of referring and supporting high-impact criminal tax and related financial investigations.
(2) The SDC assists IRS Campus Directors and field offices in identifying and assembling information on individuals and entities involved in civil and criminal noncompliance with the IRC and other related statutes.
(3) Specific SDC responsibilities include:
a. maintaining controls on all taxpayer accounts under criminal investigation
b. coordinating the QRP, RPP and Corporate Refund Fraud (BMF)
c. developing questionable refund, return preparer fraud and Corporate Refund Fraud (BMF) referrals and submitting them to field offices
d. providing court witnesses for criminal tax trials
e. training field office QRP and RPP coordinators in the SDC QRP and RPP processes
Acronyms:
QRP – Questionable Refund Program
RPP – Refund Preparer Progam
BMF – Business Master File
For context, IRM 9.4.1.5.1 (03-14-2017), Sources of Primary Investigations, here, indicates the following sources of criminal investigations:
(1) Primary investigations may be derived from many sources, including but not limited to:
a. Information Items and Whistleblowers
b. Scheme Development Centers
c. Criminal Fraud Referrals
d. Grand Jury Evaluation Requests
I assume that readers are already familiar with sources a and c, since they appear often in criminal cases. Source b, SDCs, are discussed above. Grand jury evaluation requests are “Requests from the US Attorney’s Office for IRS participation in grand jury investigations.” IRM 9.4.1.5.1.4 (03-14-2017), Grand Jury Evaluation Requests.
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