Tax Charges Stacked on Top of Drug Trafficking.

Yes, under federal law, income earned through illegal acts such as drug trafficking remains taxable. While this may seem counterintuitive, the Internal Revenue Service (IRS) and other federal authorities strictly enforce the tax obligation on all forms of income. IRS Criminal Investigation (IRS CI) agents play a critical role in financial investigations and often contribute to federal drug enforcement efforts. Unlike IRS auditors, IRS CI agents are federal law enforcement officers who investigate money laundering, wire fraud, tax evasion, and the financial aspects of drug trafficking and other illicit activities.

Drug-trafficking investigations frequently involve multi-agency task forces. While the DEA, FBI, and HSI may lead the investigation, an IRS CI agent is often assigned to uncover financial evidence. With access to federal warrants and international cooperation, IRS CI agents can examine various sources of financial information to trace the flow of drug money. In drug-trafficking cases, financial records often provide crucial evidence for federal prosecutors. Bank statements, credit card transactions, wire transfer logs, and records of real estate purchases are frequently used to substantiate allegations of substantial income from drug sales. When prosecutors uncover evidence of unreported income derived from a drug-trafficking operation, they may decide to add federal tax charges to the case. This is where the financial trail leads to further legal challenges. Instead of just facing drug-related charges, defendants may need to deal with the implications of unreported illegal income. This often includes additional concerns such as civil asset forfeiture, increased sentence exposure, or accusations of financial crimes like money laundering.

At Spodek Law Group, we represent individuals in federal investigations. When financial evidence is used in a drug-trafficking case, our experienced team can review the evidence to determine if federal tax charges are warranted and build a strong defense strategy.

Which Tax Allegations Remain Distinct from Drug and Money-Laundering Charges?

The federal government can pursue multiple charges when drug proceeds go unreported. For example, money laundering charges do not have to be present to pursue federal criminal tax charges based on underreported income, overstated deductions, or unfiled returns.

This scenario may lead to charges related to the separate offense of federal tax evasion. While some people use the term “tax invasion” to describe criminal tax offenses, tax evasion is the correct term. Tax evasion involves willfully attempting to evade or defeat taxes on income earned. This is distinct from the act of concealing the source of the funds, which is the core of the money laundering charge.

Which Allegation is More Serious for Drug Defendants?

Between tax evasion and money laundering, the latter generally leads to harsher penalties. However, it isn’t necessarily the case that one of these offenses is easier or harder to prove than the other. While a prosecutor is not required to prove money laundering to pursue federal tax evasion charges, each crime requires proving different elements beyond a reasonable doubt.

When clients find themselves facing allegations of drug trafficking, money laundering, or tax crimes, our approach is to focus on reducing their legal exposure by all means available.

Our trial lawyers use the available information to help our clients make informed decisions. At the same time, we seek opportunities to minimize our clients’ risks by aggressively countering the government’s accusations. We can guide our clients through federal tax cases and other types of criminal investigations.

When Do Financial Transactions Become Laundering or Structuring Counts?

The federal government prohibits conducting financial transactions involving proceeds from “specified unlawful activity” under 18 U.S.C. § 1956. Drug trafficking constitutes a specified unlawful activity, and transactions involving its proceeds can constitute money laundering.

Money Laundering under 18 U.S.C. § 1956

To obtain a conviction under 18 U.S.C. § 1956, the prosecution must demonstrate that the defendant knew the property involved represented the proceeds of unlawful activity and that the transaction was conducted with a specific intent. This specific intent must be either:

• Intent to promote the carrying on of the unlawful activity in which the property was involved. For example, purchasing more equipment for drug distribution;
• Intent to conceal the source, ownership, or control of the proceeds. For example, moving drug proceeds through multiple accounts; or
• Intent to avoid a state or federal transaction reporting requirement. This is often termed “structuring.”

A violation of 18 U.S.C. § 1956 carries a maximum prison sentence of twenty years per count. The maximum fine for each count is $500,000 or twice the value of the property involved in the transaction, whichever is greater. § 1957 Another federal statute, 18 U.S.C. § 1957, prohibits knowingly engaging in a monetary transaction involving criminally derived property worth more than $10,000 when the property is derived from specified unlawful activity. One key difference between the two statutes is that Section 1957 only applies in cases involving monetary transactions exceeding $10,000.

Structuring Transactions to Avoid Reporting Requirements

Structuring transactions to evade currency-transaction reporting requirements is prohibited by 31 U.S.C. § 5324; a separate violation of 18 U.S.C. § 1956 requires a transaction involving proceeds of specified unlawful activity and the statute’s additional elements.

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What Parallel Proceedings and Added Counts Can Follow the Money Trail?

The U.S. Department of Justice can take several steps to ensure that the fruits of criminal activity aren’t vanished by the time the government gets around to seizing and forfeiting them. These steps range from seeking a pre-indictment restraining order under 21 U.S.C. § 853(e) to initiating forfeiture proceedings in federal district court or seeking a civil forfeiture judgment. The Civil Asset Forfeiture Reform Act (CAFRA) imposes some of the strictest deadlines in federal law. Depending on the type of forfeiture proceeding, CAFRA deadlines may run from the seizure, the government’s notice, or a claimant’s filing, rather than uniformly from the instant of seizure. Missing these deadlines can permanently bar a claim to the property, which is why it’s so important for individuals to have experienced defense counsel involved as soon as possible. Importantly, forfeiture proceedings and criminal prosecutions are not required to move in sequence. They are often conducted in parallel, with the prosecution for drug trafficking and tax crimes continuing alongside the attempt to forfeit illegally-obtained assets.

Because of this, statements made in a civil forfeiture case can (and often do) result in the government obtaining evidence that can be used to bolster a criminal prosecution. This is a dangerous scenario that should be avoided by all means. The same is true in the other direction. A failed defense in the criminal case can make it difficult to fight forfeiture of the assets at issue, so it’s crucial to work with a team of lawyers that can see the broader legal implications of all steps.

Sentencing Guidelines are yet another issue for those convicted of criminal offenses in federal court. Prosecutors will use the same evidence used in the criminal case to push for the highest penalty, including the amount of the drugs sold and the amount of money that were involved, as well as the individual’s knowledge and command over any larger drugring.

How Can Drug Quantity and Sentencing Rules Magnify Exposure Beyond the Tax Count?

While prosecutors use drug quantities to assess trafficking charges, the quantity also heavily influences sentencing calculations. Sentencing Guidelines define “relevant conduct” that the court must consider, and this often includes the total drug quantity involved in a conspiracy. When drug-trafficking counts are added on top of tax evasion and other financial charges, the compounding effect can dramatically increase the individual’s legal exposure.

At sentencing, prosecutors use relevant-conduct findings to increase criminal defendants’ sentences. For those convicted of drug-trafficking offenses, this means that prosecutors can argue that the defendant should be held accountable not only for the amount of drugs proven at trial but also for the “reasonably foreseeable” amount of drugs that their co-conspirators sold. For example, if you played a secondary role in a drug ring but were cognizant of the conspiracy’s full activities, the total quantity of the conspiracy’s drug sales can be attributed to you.

Another complicating factor for sentencing is that relevant-conduct findings use the preponderance-of-the-evidence standard. This means prosecutors need only prove that it was “more likely than not” that the defendant engaged in the conduct they claim. This is a significantly easier standard to meet than the standard of proof required to obtain a criminal conviction.

Mandatory sentencing guidelines further increase the exposure for drug-trafficking defendants. For example, 18 U.S.C. Section 924(c) adds five additional years of mandatory consecutive sentencing for those convicted of possessing a firearm in relation to drug trafficking offenses. These five years run consecutively to the sentence for the underlying drug-trafficking offense and serve as an additional deterrent for those seeking to avoid firearm charges.

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Most first calls to a defense firm come from a family member rather than the person under investigation. If that is you, Spodek Law Group answers its phone at any hour, and families retain the firm on a relative's behalf every week. Reach it at 888 348 8028.