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United States v. Schroeder

August 5, 2008


Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. No. 05 CR 491-John W. Darrah, Judge.

The opinion of the court was delivered by: Cudahy, Circuit Judge.

ARGUED MAY 29, 2008

Before CUDAHY, POSNER and TINDER, Circuit Judges.

Jeffrey Schroeder pleaded guilty to one count of tax preparer fraud and was sentenced to 36 months' imprisonment. Schroeder appeals, arguing that the district court deprived him of his due process right to a fair sentencing hearing, used the wrong burden of proof in applying a sentencing enhancement based on relevant conduct and did not give adequate consideration to his argument for a below-guideline sentence pursuant to 18 U.S.C. § 3553(a). Because Schroeder's sentencing hearing was marred by several serious errors, we vacate his sentence and remand, noting that this marks the second time we have sent Schroeder's case back to the district court for resentencing.

I. Background

Schroeder operated a tax preparation business out of his Illinois home. In 2005 he was indicted and charged with 21 counts of tax preparer fraud in violation of 26 U.S.C. § 7206(2). In January 2006, he pleaded guilty to one count of tax preparer fraud that caused a tax loss to the United States Treasury of $6,556. In his plea agreement, Schroeder admitted to preparing tax returns that included information he knew to be false about his clients' itemized deductions. Itemized deductions are listed on federal income tax form Schedule A. By fraudulently overstating his clients' Schedule A deductions, Schroeder was able to decrease his clients' reported taxable income, yielding greater refunds than they were in fact entitled to. Schroeder also admitted that he had assisted in the preparation of at least 52 fraudulent tax returns for tax years 1999, 2000 and 2001. He also admitted that the false tax returns resulted in a total loss to the United States Treasury of at least $161,116. But at his change of plea hearing, he asserted that the $161,116 tax loss figure in the plea agreement was incorrect. The district court determined that the actual amount of loss would be determined at sentencing.

In April 2006, the United States Probation Office prepared a Pre-Sentence Investigation Report (PSR), which assigned Schroeder a criminal history category of III. The PSR based Schroeder's offense level in part on a tax loss of $428,555-the $161,116 that was included in the plea agreement as well as an additional loss of $267,439. This additional amount was based on Internal Revenue Service (IRS) correspondence audits of 25 of Schroeder's clients. The IRS concluded that Schroeder had overstated or misrepresented deductions on 52 tax returns prepared on behalf of the audited clients, resulting in a tax loss of $267,439. The results of the audits were summarized in a two-page spreadsheet that was provided to the Probation Office. The spreadsheet included the initials of the taxpayers, the year of the challenged return, the type of fraudulent itemized deduction, the amount of the fraudulently increased refund and the adjustment amount associated with the fraudulent itemized deductions.

The Tax Table in U.S.S.G. § 2T4.1 provides that a tax loss of over $400,000 corresponds to an offense level of 20. The $161,116 amount of loss that was originally included in the plea agreement corresponds to an offense level of 16. The PSR increased Schroeder's base offense level due to specific offense characteristics and reduced it due to Schroeder's cooperation and acceptance of responsibility. After accounting for these adjustments, the PSR concluded that the total offense level was 19. An offense level of 19 and a criminal history category of III yielded a sentencing range of 37 to 46 months.

Schroeder filed a sentencing memorandum challenging the inclusion of the additional $267,439 in the amount of loss calculation on the grounds that the materials supporting the additional tax loss had not been made available to the defense. He argued that his base offense level should be based on a tax loss of $161,116. After accounting for adjustments, using the lower tax loss amount would result in a total offense level of 15 and a sentencing range of 24 to 30 months. He also asserted that his family circumstances justified a sentence below the guideline sentencing range. In particular, he claimed that his incarceration would impose a hardship on his adopted daughter, who was born with various medical problems arising from her biological mother's drug abuse. The government filed a response to Schroeder's sentencing memorandum in which it asserted that although the individual tax returns underlying the additional tax loss had not been provided to defense counsel, the spreadsheet had been given to the defense.

At Schroeder's sentencing, the district court heard testimony from IRS Special Agent Zagota, who testified that, in the course of the criminal investigation, he had interviewed witnesses to determine the original tax loss of $161,116. Although Special Agent Zagota was not involved in the civil audits, he explained that the additional tax loss was ascertained via correspondence audits, in which the IRS sent letters to Schroeder's clients inviting them to provide documentation supporting the itemized deductions on their tax returns. If they could not justify their deductions, their tax returns were adjusted accordingly. Special Agent Zagota also opined that the total amount of loss was a conservative figure given that Schroeder had prepared thousands of tax returns in 2000 and 2001 and that over 90 percent of those returns claimed refunds. The court accepted the additional $267,439 tax loss amount, declined to impose a below-guidelines sentence based on Schroeder's family situation and sentenced Schroeder to 42 months' imprisonment and one year supervised release.

Schroeder filed a notice of appeal on November 22, 2006, but a few months later, he and the government submitted a joint motion for summary reversal and remand based on the fact that the 42-month sentence imposed by the district court exceeded the statutory maximum of 36 months. The motion stated:

The parties agree that it would be a waste of their resources and of the Court's resources to proceed through briefing and consideration of an appeal for a case that must be reversed and remanded for resentencing.

Wherefore, it is respectfully requested that the judgment in this case be reversed and that the case be remanded to the district court for resentencing.

We granted the motion in a brief order, summarily reversing and remanding the case "for the limited purpose of resentencing." R. 60.

On remand, Schroeder moved for an order requiring the government to produce the tax returns on which the additional amount of loss was based and for an order authorizing defense counsel to obtain expert services for the resentencing hearing. These motions were granted and the defense reviewed the underlying documents with expert assistance. In June 2007, Schroeder submitted a supplemental sentencing memorandum challenging the $267,439 additional tax loss on the grounds that the civil audits did not represent a reliable method of assigning criminal liability. Schroeder argued that the purpose of the civil audit was to collect unpaid taxes and that it was not designed to attribute responsibility for the improper deductions. Some taxpayers did not respond to the IRS's invitation to defend their deductions and in those cases, he asserted, the IRS assumed that Schroeder was probably responsible for the false information. He pointed out that one taxpayer admitted that she had overstated her business expenses but that the government included the full amount of the liability resulting from her misrepresentation in calculating Schroeder's amount of loss. In addition, Schroeder again argued that his unique family circumstances weighed in favor of a lower sentence. He informed the court that he had been the primary caregiver for his adopted daughter while his wife worked outside the home. He stated that after his ...

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