Opinion ID: 757097
Heading Depth: 2
Heading Rank: 2

Heading: Alleged Misuse of Civil IRS Audit

Text: 76 Clark and Wadena contend that in late 1993, the IRS conducted a civil audit of Northern with the express and undisclosed purpose of gathering information for a criminal investigation. Specifically, they allege the government's chief investigator in this case, Agent Michael Nelson of the IRS' Criminal Investigation Division (CID), had knowledge that IRS auditors were preparing to conduct a civil audit at the time the government was conducting a criminal investigation into the same matters to be examined by the civil audit. As supporting evidence of this contention, Clark and Wadena assert that in early November 1993, before the IRS formally notified defendants of the upcoming civil audit, Agent Nelson asked Greg Nygren, an IRS representative working on the civil audit, to fax him a copy of a past tax return of Wadena's. The civil audit was not referred to the CID until 1994. 77 Clark and Wadena complain the IRS's simultaneous investigations violated their Fourth and Fifth Amendment rights. During trial, Clark and Wadena made various motions to suppress the evidence obtained from the civil audit and any evidence derived therefrom. The district court denied the motions. On appeal, Clark and Wadena claim the district court erred in denying their motions. We review for clear error the facts supporting a district court's denial of a motion to suppress. See United States v. Cunningham, 133 F.3d 1070, 1072 (8th Cir.1998) (citing Ornelas v. United States, 517 U.S. 690, 116 S.Ct. 1657, 1663, 134 L.Ed.2d 911 (1996)), cert. denied by, --- U.S. ----, 118 S.Ct. 1823, 140 L.Ed.2d 960 (1998). We review de novo the legal conclusions based upon those facts. Id. 78 [T]he IRS may not develop a criminal investigation under the auspices of a civil audit. United States v. Grunewald, 987 F.2d 531, 534 (8th Cir.1993). 79 Evidence obtained in the course of a criminal investigation, where the defendant has not been apprised of the nature of the investigation, may be suppressed only if the defendant establishes that: (1) the IRS had firm indications of fraud by the defendant, (2) there is clear and convincing evidence that the IRS affirmatively and intentionally misled the defendant, and (3) the IRS's conduct resulted in prejudice to defendant's constitutional rights. 80 Id. (citing United States v. Meier, 607 F.2d 215, 217 (8th Cir.1979) and United States v. Tweel, 550 F.2d 297, 299 (5th Cir.1977)) (emphasis added). Although Clark and Wadena allude to the three Grunewald factors, they do not directly address the factors or acknowledge their burden to establish the existence of those factors. See Wadena Br. at 10-19; Clark Br. at 44-46. Instead, they focus their arguments on Agent Nelson's knowledge of and alleged direction of the simultaneous criminal investigation and civil audit, as well as his alleged failure to refer the case to the CID. For the reasons discussed below, we conclude the defendants have not shown the existence of the Grunewald factors, and the IRS's investigations did not violate their Fourth and Fifth Amendment rights. 81 An IRS auditor conducting a civil audit who detects a firm indication of fraud must suspend the audit and refer the case for evaluation by the CID. See Grunewald, 987 F.2d at 534 (citing Audit Guidelines for Examiners, CCH Internal Revenue Manual (Audit), §§ 4231, 4564.21, 9322.1). A firm indication of fraud is different than an initial indication that fraud exists, and it is more than a mere suspicion of fraud. See Groder v. United States, 816 F.2d 139, 143 (4th Cir.1987). Whether Nygren (the civil auditor) had a firm indication of fraud and failed to suspend the civil audit is a question of fact we review for clear error. See Cunningham, 133 F.3d at 1072. Clark and Wadena do not present any evidence showing that Nygren had a firm indication of fraud and failed to suspend the civil audit of Northern. Further, Nygren specifically denied he suspected any fraud when he mailed the audit letter to Northern. Our review of Nygren's trial testimony pertaining to the simultaneous investigations likewise does not indicate Nygren had a firm indication of fraud and failed to refer the case to the CID. Thus, neither Clark nor Wadena have established the first Grunewald factor. 82 [T]he mere failure of an IRS agent to inform a defendant that information developed in an audit may result in a further criminal investigation does not indicate affirmative and intentional deceit by the IRS. Grunewald, 987 F.2d at 534. Clark and Wadena do not present clear and convincing evidence that the IRS affirmatively and intentionally misled the defendants by conducting the civil audit of Northern with the express purpose of obtaining records for the criminal investigation. Indeed, defendants point to nothing more than knowledge by Nygren that Agent Nelson was conducting a criminal investigation. Neither Clark nor Wadena have established the second Grunewald factor. Given Clark's and Wadena's failure to establish the first two Grunewald factors, we need not address the third Grunewald factor. In sum, we conclude the district court did not err when it denied Clark's and Wadena's various motions to suppress the evidence obtained from the civil audit and any evidence derived therefrom.