A federal court of appeals ruled this week that two fugitives accused of failing to report taxable earnings are not entitled to Internal Revenue Service (IRS) records gathered for use in the criminal investigations against them.
The U.S. Court of Appeals in Seattle (9th Cir.) upheld the government’s argument that releasing the requested documents – which included agents’ working papers, a witness list, and internal correspondence – would impede its enforcement proceedings.
The fugitives, Steven Cheung and Linda Su Cheung, are U.S. citizens who were indicted in 2003 for conspiracy to defraud the U.S. for allegedly concealing millions of dollars generated from business conducted in Hong Kong. The couple did not appear at their arraignment, and, according to the court’s opinion, federal officials believe they fled to China – which has no extradition treaty with the U.S. – with plans to remain there indefinitely.
While their absence from the country stalled the criminal proceedings, the IRS – deviating from its normal procedure of waiting until the completion of the criminal prosecution – initiated a civil investigation of the Cheungs and companies they allegedly owned, and assessed them $17.5 million in back taxes, penalties, and interest.
Their attorney, William Shannahan, protested these findings to the IRS and asked for the documents on which it had based its assessments. The IRS refused and asked that the Cheungs appear personally for an interview at an IRS office in Seattle. Shannahan then requested the records under the federal Freedom of Information Act, and sued when the IRS claimed various exemptions to justify withholding the records. Upon receiving the complaints, the IRS released some of the requested records, but withheld the vast majority.
The court affirmed the lower court’s ruling that the records were properly withheld under Exemption 3, which covers records that are specifically exempt under other laws – here, the internal revenue code. Under the code, “returns and return information” may be disclosed to a taxpayer, but only if the release “would not seriously impair Federal tax administration.”
The IRS argued that releasing the records would result in such impairment by giving the Cheungs greater and earlier access to information about the proceedings than would otherwise be available to them and allow them to formulate defenses or explanations in reliance on the government’s analysis of their case. Additionally, the IRS asserted, the Cheungs could use the records to determine strategies used by the government in the criminal proceedings and help them hide income.
The appellate court also upheld the agency’s claim the records fell under FOIA Exemption 7(A), as they contained information compiled for law enforcement purposes and their release would interfere with its enforcement proceedings against the Cheungs. An IRS special agent claimed that releasing the records could permit the Cheungs to deduce the identity of confidential informants based on the information they provided, thereby discouraging their further participation and potentially exposing them to harm.
The court emphasized that the lower court was “meticulous” in requiring the government to defend its withholdings. The lower court required the IRS to submit a Vaughn index of documents representative of the categories of records withheld with explanations of why they were exempt and how the representative documents were selected. Further, the court sought evidence of the harm that would be caused by the release of the records, and explanations for why the exempt documents could not reasonably be segregated from material that was not exempt.
The appeals court then stated that “FOIA is not designed ‘as a substitute for civil discovery,’” describing the Cheungs’ inability to access the records as a “problem . . . partly of their own making.”
If they had remained in the U.S., the court explained, the IRS would likely have waited until the completion of the criminal case before instituting the civil proceedings. According to the court, once the criminal case was complete, the Cheungs would have received some of the documents they sought either during the criminal proceedings or after the close of those proceedings, when the harm in disclosure would have been diminished.
“But here the criminal proceedings have not taken place because the Cheungs have fled,” the court said, “and they must live with the consequences.”
U.S. Department of Justice officials declined to comment on the ruling. Attorneys for the plaintiff could not be reached for comment.
Related Reporters Committee resources:
· Federal Open Government Guide: 7. Law enforcement records
· Federal Open Government Guide: 3. Statutory exemption