TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Tuesday, March 29, 2011

NY Times: Why and How the IRS Pursues a Criminal Case

New York Times, In Prison for Taking a Liar Loan, by Joe Nocera:

Charlie Engle wasn’t a seller of bad mortgages. He was a borrower. And the “mortgage fraud” for which he was prosecuted was something that literally millions of Americans did during the subprime bubble. Supposedly, he lied on two liar loans. ...

It’s not just that Mr. Engle is the smallest of small fry that is bothersome about his prosecution. It is also the way the government went about building its case. ...

As a young man, Mr. Engle had been a serious drug addict, but after he got clean, he became an ultra-marathoner, one of the best in the world. In the fall of 2006, he and two other ultra-marathoners took on an almost unimaginable challenge: they ran across the Sahara Desert, something that had never been done before. The run took 111 days, and was documented in a film financed by Matt Damon, who served as executive producer and narrator. ...

The film, Running the Sahara, was released in the fall of 2008. Eventually, it caught the attention of Robert W. Nordlander, a special agent for the IRS. As Mr. Nordlander later told the grand jury, “Being the special agent that I am, I was wondering, how does a guy train for this because most people have to work from nine to five and it’s very difficult to train for this part-time.” (He also told the grand jurors that sometimes, when he sees somebody driving a Ferrari, he’ll check to see if they make enough money to afford it. When I called Mr. Nordlander and others at the IRS to ask whether this was an appropriate way to choose subjects for criminal tax investigations, my questions were met with a stone wall of silence.) ...

Still convinced that Mr. Engle must be hiding income, Mr. Nordlander did undercover surveillance and took “Dumpster dives” into Mr. Engle’s garbage. He mainly discovered that Mr. Engle lived modestly.

In March 2009, still unsatisfied, Mr. Nordlander persuaded his superiors to send an attractive female undercover agent, Ellen Burrows, to meet Mr. Engle and see if she could get him to say something incriminating. In the course of several flirtatious encounters, she asked him about his investments.

After acknowledging that he had been speculating in real estate during the bubble to help support his running, he said, according to Mr. Nordlander’s grand jury testimony, “I had a couple of good liar loans out there, you know, which my mortgage broker didn’t mind writing down, you know, that I was making four hundred thousand grand a year when he knew I wasn’t.” Mr. Engle added, “Everybody was doing it because it was simply the way it was done. That doesn’t make me proud of the fact that I am at least a small part of the problem.”

Unbeknownst to Mr. Engle, Ms. Burrows was wearing a wire.

Lying on a stated-income loan is, without question, a crime, and one ought not to excuse it even though, as Mr. Engle says, “everybody was doing it” — usually with the eager encouragement of their brokers. But the Engle case raises questions not just about the government’s priorities, but about something even more basic: did he even commit the crimes he is accused of? ...

But the more I looked into it, the more I came to believe that the case against him was seriously weak. No tax charges were ever brought, even though that was Mr. Nordlander’s original rationale. Money laundering, the suspicion of which was needed to justify the undercover sting, was a nonissue as well. As for that “confession” to Ms. Burrows, take a closer look. It really isn’t a confession at all. Mr. Engle is confessing to his mortgage broker’s sins, not his own.

Perhaps anticipating that problem, when Mr. Nordlander finally arrested Mr. Engle in May 2010, he claims to have elicited a stronger, better confession while Mr. Engle was handcuffed in the back seat of his car. Mr. Engle fervently denies this. This second supposed confession, however, was never captured on tape.

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So we taxpayers are paying this gumshoe what, $70-80K to waste our $ like this? Enough already

Posted by: H Doughty | Mar 30, 2011 7:54:13 AM

Just as we should be profiling at airports, IRS should be profiling for tax cheats.

Posted by: TaxpayerToo | Mar 30, 2011 8:24:20 AM

The fact that this IRS agent could pursue this case without any facts and his superiors and others went along with him is apalling! Talk about ruining someone else's life for no reason. This is insane.

Posted by: Hard to believe | Mar 30, 2011 9:59:49 AM

When oh when will they stop tryng to fry the little fish and have a fish bake with the big ones?

Posted by: DebbieB | Mar 30, 2011 10:13:23 AM

False statements on a bank loan application is a crime under Title 18 Section 1014. It defrauds banks in two ways: the applicant gets a better rate on the loan because the bank feels he is less of a credit risk, and if the loans go sour, as many did in the last bust, the bank is left holding the bag. It is not fair to put this entirely on the mortgage broker- he did not sign the loan application, the applicant did, with full knowledge that the contents misrepresented his financial position.

Is this what the IRS should be doing? No. They should be actively pursuing tax cheats. But if, in the course of fulfilling this duty they come across other crimes, yes, they should pursue the case.

But, really... nothing better to do than non-defaulted loans? How about bringing some revenue in to the coffers?

Posted by: Jim | Mar 31, 2011 5:09:53 AM

Remember, we live in the land of the free. We don't have an oppressive government like those foreign people.

Posted by: anon | Mar 31, 2011 3:47:23 PM