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What is a Klein Conspiracy?

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    In a sentence a Klein conspiracy exists when one conspiracies to “impair or impede” the lawful functions of the federal government. But, as explained below, the real scope of a Klein conspiracy is presently a bit murky. To better understand this a little background is necessary.

    a. Two Crimes Described in One Statute (18 U.S.C. § 371)

    The general conspiracy statute is 18 U.S.C. § 371, which criminalizes two different types of conduct. The statute makes it an offense “[i]f two or more persons conspire either to commit any offense against the United States, or to defraud the United States, or any agency thereof in any manner or for any purpose.” The first part of this statute is called the Offense Clause. It prohibits one from conspiring to commit any federal offense (i.e. one that is defined elsewhere). The second part is called the Defraud Clause—it seeks to prohibit a conspiracy to “defraud the United States.” It does not require proving that the taxpayer committed any other offense; it “stands on its own” as it were.

    b. The Courts define Defraud Clause

    Congress never defined what it means to “defraud the United States.” Consequently, over the years the courts have sought to fill in this phrase with their case law. And the courts took a broad interpretation of the phrase; it has been interpreted to prohibit one’s conspiracy to “impair or impede” the lawful functions of the federal government—so called “Klein Conspiracies.” Usually, the phrase has been used to litigate one’s acts of impairing the IRS’s ability to collect tax.

    As mentioned, the courts took a broad interpretation. They captured conduct within this definition that is not a crime under other federal statutes. Is it true that making the IRS’s job harder is criminal? A recent case casts serious doubts on the foundational interpretation of Section 371. Historically, the Supreme Court interpreted Section 371 broadly.

    But the Second Circuit case (United States v. Coplan, 703 F.3d 46 (2d Cir. 2012)) gave the Supreme Court a chance to revisit that foundational interpretation. If the Court heard the case, and it were taxpayer favorable, then the IRS’s prosecutorial legal theories could have been curtailed; and the opposite is true if the case were favorable toward the government. But if the Court were to decide against hearing the case (denying certiorari) then the matter would continue to be unclear. Unfortunately, in October 2013, the Supreme Court declined to hear the case. The Second Circuit decision seemed favorable to the taxpayer’s position regarding the limited interpretation of Section 371, but it was ultimately bound by the Supreme Court’s prior interpretation of it. (The defendants argued that there existed no textual basis for interpreting the Defraud Clause as anything other than depriving another of property rights).

    There are three elements to a Klein conspiracy: (1) the existence of an agreement to defraud or impede by dishonest means the IRS in its assessment or collection of tax; (2) the taxpayer knew of the agreement and voluntarily partook in the conspiracy; and (3) the conspirators committed an overt act to further a conspiracy.

    Why does the IRS like to assert a Klein conspiracy?

    The short answer is because it is easier. It is easier for the IRS to prove that a taxpayer made the government’s job harder than it is to prove that he or she actually committed a specific crime—and the IRS has discovered this much with its prosecution of “tax shelters.”

    A taxpayer can commit tax evasion in one of several ways. One such type dubbed a “Spies evasion” violation occurs when a taxpayer (i) fails to file his tax return, and (ii) his action is coupled with an “affirmative act of evasion,” that has the effect to mislead the government or conceal something from it. Spies v. United States, 317 U.S. 492, 499 (1943).

    But this raises the question what “willfulness” means. According to U.S. v. Pomponio, a taxpayer acts willful when he “voluntar[ily], intentional[ly] violate[s] a known legal duty.” The Spies Court recognized a distinction between one’s good faith misunderstanding of the tax laws and affirmative acts of willful tax evasion. It acknowledged that the tax laws were “complex” and that one should not be penalized “frank differences of opinion or innocent errors made despite the exercise of reasonable care.” Nearly three-quarters of a century later, the tax laws have become even more complex. Partly due to its complexity there is spawned various “tax shelters”—legal structured that lack business purposes but achieve tax benefits to a client. Many of these shelters make it difficult for the IRS to audit the structure.

    To combat these tax shelter structures the IRS increasingly asserted Klein conspiracies against those involved. In that case, all the IRS would need to show is that the person involved made an attempt, by using dishonest means, of preventing the IRS from carrying out its tax collecting and assessment.

    What makes Klein conspiracy cases so interesting—and frustrating—is that the IRS will assert a conspiracy charge even if the taxpayer complied perfectly with the letter of the tax law. That is, even if the tax position taken by the taxpayer is perfectly correct, the IRS may still assert a Klein Conspiracy on the grounds that he has attempted to avoid the IRS’s ability to detect and conduct an audit. The idea here is that the combined tax positions, while individually are innocent, are collectively “fraudulent in context,” or, as U.S. v. Coplan 703 F. 3d 46 (2nd Cir. 2012) says, “decepti[ve] in context.”

    The taxpayer in the Coplan case was said to make it difficult for the IRS to audit the taxpayer. The IRS asserted that the taxpayer “engaged in various acts [that were] not inherently deceptive” but were “deceptive in the context of [the] case.” The IRS discusses the Coplan case at length on its website:

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