U.S. v. Peters

• Decision Date: 17 August 1998
• Docket Number: No. 97-2634,97-2634
• Citation: 153 F.3d 445
• Parties: -5719, 98-2 USTC P 50,650 UNITED STATES of America, Plaintiff-Appellee, v. Florence L. PETERS, Defendant-Appellant.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 445

153 F.3d 445

82 A.F.T.R.2d 98-5719, 98-2 USTC P 50,650

UNITED STATES of America, Plaintiff-Appellee, v. Florence L. PETERS, Defendant-Appellant.

No. 97-2634.

United States Court of Appeals Seventh Circuit.

Argued April 7, 1998.

Decided Aug. 17, 1998.

Joan B. Safford (argued), Office of the United States Attorney, Criminal Division, Chicago, IL, for Plaintiff-Appellee.

Cynthia Giacchetti, Chicago, IL, Sanford J. Boxerman, David V. Capes (argued), Rosenblum, Goldenhersh, Silverstein & Zafft, P.C., St. Louis, MO, for Defendant-Appellant.

Before EASTERBROOK, RIPPLE and EVANS, Circuit Judges.

RIPPLE, Circuit Judge.

After a jury trial, Florence L. Peters was convicted of four counts of making false statements on her tax returns in violation of 26 U.S.C. § 7206(1) ¹ and one count of corruptly attempting to impede the administration of the internal revenue laws in violation of 26 U.S.C. § 7212(a). ² On appeal, Dr. Peters contends that the district court erred in denying her motion to suppress evidence which, in her view, the IRS had obtained in violation of her Fourth and Fifth Amendment rights. In addition, Dr. Peters asserts that the evidence presented at trial was insufficient to support the jury's verdict. For the reasons discussed in the following opinion, we affirm the judgment of the district court.

I BACKGROUND

A. The Contours of an IRS Investigation

The IRS splits the responsibility for enforcing the nation's tax laws between its two investigative divisions. The Criminal Investigative Division ("CID") is charged with investigating criminal violations of the tax code and related federal statutes. CID investigators are called "special agents." Like many other criminal law enforcement agents, they carry firearms and badges. In addition, special agents must recite an administrative warning prior to soliciting information from taxpayers. See Beckwith v. United States, 425 U.S. 341, 343, 96 S.Ct. 1612, 48 L.Ed.2d 1 (1976) (quoting warning provided by special agents).

On the other hand, the Examination Division of the IRS is responsible for conducting civil tax audits. Examination Division investigators are known as "revenue agents." In contrast to special agents, revenue agents do not carry firearms; nor are they required to provide taxpayers with an administrative warning. Although an Examination Division audit typically concludes with some sort of civil settlement between the IRS and the taxpayer, such an audit may uncover evidence that causes the revenue agent to refer the case to the CID for criminal investigation. Under IRS regulations, a revenue agent who uncovers a "firm indication of fraud on the part of the taxpayer" must immediately suspend her audit and refer the case to the CID. See Internal Revenue Manual § 4565.21(1). At that point, the CID enters the case and the IRS' efforts become focused on the possibility of criminal prosection. See generally Michael I. Saltzman, IRS Practice and Procedure pp 12.01 & 12.03[a]. This case, in large part, concerns the distinction between a civil tax audit and a criminal tax investigation.

B. The Investigation

In October 1988, Marshall Peters, the former husband of podiatrist Dr. Florence Peters, called the Internal Revenue Service to report that he had information indicating that Dr. Peters had been cheating on her taxes. Marshall's call was received by Special Agent Gerald Padar of the CID. On October 6, Special Agent Padar went to Marshall's home; there he met with Marshall and his new wife, Eloise. At that meeting, Marshall showed Padar original corporate checks for Dr. Peters' corporation, ³ checks that Marshall had received in connection with a child support suit. A few weeks later, Marshall provided Padar with photocopies of corporate checks allegedly used by Dr. Peters to pay personal expenses. Marshall and Eloise Peters ultimately provided Padar with more than 300 pages of documents, including photocopies of more than 400 checks that Dr. Peters allegedly wrote for personal expenses but deducted as business expenses.

Special Agent Padar held this information for 18 months but did not open a formal criminal investigation. Instead, he maintained a file on Dr. Peters in the bottom drawer of his desk, where he collected the information supplied by Marshall and Eloise. On a few occasions, Padar reviewed the checks in that file. In addition, on one occasion, Padar drove by Dr. Peters' home to see what he could glean about her lifestyle and to attempt to corroborate information he had received from Marshall and Eloise concerning an addition to Dr. Peters' home. During that time, Padar received a few calls from Marshall and Eloise seeking information on the progress of the investigation. ⁴ Padar informed them that, under IRS nondisclosure regulations, he could not tell them anything. In January 1990, Special Agent Padar "walked" the information across the hall to the Examination Division. At that time, he prepared a two-page handwritten summary reflecting the informants' view of Dr. Peters' tax violations. He included that summary with the file. Padar did no further investigation. ⁵

Padar's file on Dr. Peters ultimately landed on the desk of Thomas Ridgeway, a group manager in the Examination Division. Ridgeway assigned the case to Revenue Agent Margo Thompson, whom he described as a "rookie" in corporate audits. The Peters case was Thompson's first corporate audit that needed significant further development. When Ridgeway passed the file on to Thompson, he informed her that the case had begun because of an informant's tip received by the CID. He instructed Thompson to meet with the informants and to conduct an audit to determine if Dr. Peters had, in fact, deducted personal expenses as business expenses. Nonetheless, Thompson did not prepare a written audit plan because, in her view, the audit was routine. Thompson held this view because she had worked on other cases that were prompted by an informant's tip but were treated as routine civil audits and did not evolve into criminal investigations.

Revenue Agent Thompson began her audit by inputting the checks on the computer and calling up Dr. Peters' 1987 and 1988 returns. On July 2, 1990, Thompson initiated the first IRS contact with Dr. Peters. Thompson sent a standard form letter to Dr. Peters notifying her that her corporate returns for 1987 and 1988 had been selected for an audit and requesting a meeting. Attached to the letter was the standard Information Document Request for a corporate audit, requesting numerous corporate and accountant records. Thompson also attached copies of two other documents which are routinely sent to the taxpayer when the IRS initiates a civil audit: (1) IRS Publication 1, a form called "Your Rights as a Taxpayer," and (2) IRS Notice 609, the "Privacy Act Notice." The purpose of IRS Publication 1 is to inform the taxpayer of her rights and some of the basic procedures and policies associated with a civil audit. The Privacy Act Notice informs the taxpayer of the IRS' legal right to ask for information, the reason the agency is asking for it ("to carry out the tax laws of the United States") and the consequences of failing to cooperate with the audit ("you may be charged penalties and, in certain cases, you may be subject to criminal prosecution"). The letter and attached forms contained no indication that the audit had been prompted by an informant's tip or that the case had been referred by the CID.

In response to this notice, Dr. Peters contacted the IRS and informed Thompson that her accountant, William Morrison, would represent her in the audit. Commencing shortly thereafter, Thompson conducted a series of personal meetings and telephone contacts with Morrison. During the course of these communications, Morrison asked Thompson whether she was conducting a "routine" or "ordinary" audit, and she replied in the affirmative. Although he did not remember Thompson specifically using the words "random" or "routine," he "absolutely" had the impression that it was a routine audit. Morrison came to this conclusion because of the normal manner in which Thompson was proceeding more than anything she said. Indeed, at the time of her initial meetings with Morrison, Thompson did not believe that any fraud was involved or that Dr. Peters had any criminal problems. She conducted the audit like any other. She did not inform Morrison that the investigation had been prompted by an informant's tip or referred by the CID. ⁶ Nor did she provide a verbal warning that Dr. Peters might be subject to criminal penalties. Accordingly, Morrison continued to provide information on the belief that it was a routine audit. ⁷

On November 5, 1990, Thompson first met with Dr. Peters. Prior to this meeting, Thompson had discovered an apparent discrepancy of approximately $100,000 in Dr. Peters' tax filings. However, she did not know yet whether this was a real discrepancy. This initial meeting lasted about two hours. Thompson conducted the meeting in the same manner as any other civil audit. She did not give Dr. Peters any indication or warning that there might be a possible criminal problem. She used the standard computer-generated interview form and asked the same general questions that she would ask in any audit. At the meeting, Thompson reiterated requests for information concerning Dr. Peters' corporation in order to verify the purpose of various corporate expenditures claimed by Dr. Peters. At this point, Thompson did not believe there was fraud but had concluded that there were expenses that needed to be explained.

However, by March 1991, Thompson began to suspect that the case might involve fraud. On March 28, after Thompson received Morrison's signed power of attorney, she informed him that she had discovered approximately $200,000 in unreported income and that she had questions regarding the legitimacy of some claimed business expenses. A few days later during another...