Littlejohn’s Unjust Tax Sentence

Reuven S. Avi-Yonah

Reuven S. Avi-Yonah is the Irwin I. Cohn Professor of Law at the University of Michigan Law School. He thanks Bob Lord, Robert Goulder, Joe Thorndike, Alex Zhang, and Gabriel Zucman for their helpful comments.

In this installment of Reflections With Reuven Avi-Yonah, Avi-Yonah argues that former IRS contractor Charles Littlejohn received too harsh a sentence for leaking high-profile tax returns.

On May 1 Charles Littlejohn began serving a five-year prison sentence for unauthorized disclosure of tax information. His crime is described by the Department of Justice as follows:

According to court documents, Charles Littlejohn, 38, of Washington, D.C., while working at the IRS as a government contractor, stole tax return information associated with a high-ranking government official (Public Official A). Littlejohn accessed tax returns associated with Public Official A (and related individuals and entities) on an IRS database after using broad search parameters designed to conceal the true purpose of his queries. He then uploaded the tax returns to a private website in order to avoid IRS protocols established to detect and prevent large downloads or uploads from IRS devices or systems. Littlejohn then saved the tax returns to multiple personal storage devices, including an iPod, before contacting News Organization 1. Between around August 2019 and October 2019, Littlejohn provided News Organization 1 with the tax return information associated with Public Official A. Littlejohn subsequently stole additional tax return information related to Public Official A and provided it to News Organization 1. Beginning in September 2020, News Organization 1 published a series of articles about Public Official A’s tax returns using the tax return information obtained from Littlejohn. . . .

In July and August 2020, Littlejohn separately stole tax return information for thousands of the nation’s wealthiest individuals. Littlejohn was again able to evade detection by uploading the tax return information to a private website. In November 2020, Littlejohn disclosed this tax return information to News Organization 2, which published nearly 50 articles using the stolen data. Littlejohn then obstructed the forthcoming investigation into his conduct by deleting and destroying evidence of his disclosures.¹

As anyone following the case would know, Public Official A is former President Donald J. Trump, and News Organization 1 is The New York Times. News Organization 2 is ProPublica, which published articles about the tax returns of the wealthiest Americans, including Elon Musk, Jeff Bezos, and Mark Zuckerberg.

Littlejohn performed a public service. A presidential tax return contains highly relevant information to the voting public, and Trump broke decades of tradition by refusing to disclose his returns. Moreover, when former President Nixon’s tax return was leaked in the 1970s, the IRS leaker was not indicted.²

As for the superrich, information about how little tax they pay is even more important because it reveals the deep policy flaws of an income tax system that allows Warren Buffett to pay a lower tax rate than his secretary. As Gabriel Zucman wrote recently:

In the 1960s, the 400 richest Americans paid more than half of their income in taxes. Higher tax rates for the wealthy kept inequality in check and helped fund the creation of social safety nets like Medicare, Medicaid and food stamps. Today, the superrich control a greater share of America’s wealth than during the Gilded Age of Carnegies and Rockefellers. That’s partly because taxes on the wealthy have cratered. In 2018, America’s top billionaires paid just 23 percent of their income in taxes. For the first time in the history of the United States, billionaires had a lower effective tax rate than working-class Americans.³ [Emphasis added.]

It is only by examining tax returns that the public can understand why this happens and what can be done about it. That is why when the income tax only applied to the rich, Congress enacted tax return information disclosure provisions in the 1860s, 1920s, and 1930s. This is also why in countries with a stronger sense of egalitarianism but significant inequality like Finland, Norway, and Sweden, most tax information is public despite the concerns about privacy.⁴

Under current law, disclosing tax returns is a crime, and Littlejohn pleaded guilty. Under the sentencing guidelines, his maximum sentence was 10 months, but Judge Ana Reyes of the U.S. District Court for the District of Columbia sentenced him to five years, or six times the maximum sentence, on the grounds that others must be deterred from doing the same. In her remarks, she compared Littlejohn with some of the January 6 defendants.⁵

The Department of Justice and the Treasury Inspector General for Tax Administration likewise emphasized the importance of deterrence. Acting Assistant Attorney General Nicole M. Argentieri of the Justice Department’s Criminal Division said that “today’s sentence sends a strong message that those who violate laws intended to protect sensitive tax information will face significant punishment.” Acting Inspector General Heather Hill of TIGTA added that “this sentence should serve as a warning to anyone who is considering emulating Mr. Littlejohn’s actions.”⁶

But is deterrence necessary in this case? Not really. There is a reason why IRS workers almost never leak tax information: They know that (like Littlejohn) they will likely be caught because it is easy to discover who accessed the relevant returns, and that they will lose their jobs and probably go to jail. Ten months in jail is a sufficient deterrent, and most IRS employees do not value the public’s right to know over their own personal freedom.

Littlejohn’s sentence is particularly harsh in comparison with some recent sentences meted out to blatant tax evaders.

First, there are many cases that involve massive tax evasion and do not lead to a criminal indictment. Consider, for example, the case of Alon Farhy, who recently had his penalties for failing to disclose foreign accounts reinstated by the D.C. Circuit. According to the court:

In 2004, U.S. permanent resident Alon Farhy developed a scheme to falsely underreport to the IRS his income from exercising certain stock options he received from his then-employer. Seeking to fabricate losses to reduce his U.S.-reportable income, he transferred more than $2 million to a sham foreign entity, which then transferred the funds to a bank account in the name of a Belize-based corporation Farhy created solely for that purpose. Farhy’s scheme violated a variety of tax-related obligations beyond his duty to correctly report and pay the income tax he owed. Most relevant to this case, he also failed to report to the IRS his control of foreign financial accounts and foreign corporations he used in the scheme. In 2012, Farhy signed a non-prosecution agreement with the Tax Division of the U.S. Justice Department that immunized him from criminal prosecution for his failure to disclose his offshore accounts, provided he cooperated fully and truthfully with tax enforcement efforts and paid all applicable taxes, interest, and penalties.⁷ [Emphasis added.]

Second, consider the sentencing in the following recent cases:

Raju J. Mukhi is a U.S. taxpayer who lives in St. Louis. He was a successful businessman by all accounts, running a business that manufactured and sold professional uniforms. He conducted business through his company, Contract Management Services LLC, which had a sales footprint that stretched across many countries. In connection with his business operation, Mukhi established three foreign entities: Sukhmani Partners II Ltd., the Sukhmani Gurkuh Nivas Foundation, and Gurdas International Ltd. Through these offshore entities he opened several foreign financial accounts with Goldman Sachs and Clariden Leu, a private bank based in Zurich. Mukhi used these accounts to conceal funds from the IRS. The accounts were based in Singapore and Switzerland. These activities led to Mukhi being indicted by a federal grand jury in 2014. The indictment consisted of two felony counts of filing a false income tax return for 2006 and 2008, and four felony counts of failing to file [foreign bank account reports] for the period from 2007 through 2010. The criminal case against Mukhi was brought before the U.S. District Court for the Eastern District of Missouri. He pleaded guilty to one count of filing a false tax return and one of the FBAR counts. He was sentenced to three years of supervised release.⁸ [Emphasis added.]

An Oklahoma man was sentenced yesterday to 30 months in prison for evading over $1 million in income taxes. According to court documents and statements made in court, from 2014 to 2019, Phillip Barry Albert was President of Pelco Structural LLC, a steel pole manufacturing company located in Claremone, Oklahoma. During that period, Albert directed Pelco’s outside payroll service company to pay him over $2.6 million of Pelco’s funds, which should have been treated as income to him. Albert, however, instructed that the payroll company falsely characterize the payments as reimbursements rather than income, so that the payroll company would not withhold federal income taxes or report the payments as wages on Albert’s Forms W-2. Albert then did not report the payments on his income tax returns for those years. Albert caused a tax loss to the IRS of $1,000,232.⁹ [Emphasis added.]

An Indiana woman was sentenced today to 21 months in prison for conspiring to file false tax returns, wire fraud and tax evasion. According to court documents and statements made in court, Awett Tedla, now of Indianapolis, was the owner and operator of Speedy Tax Services LLC in Washington, D.C., and District Heights, Maryland. From 2012 through 2016, Tedla and her co-conspirators prepared and electronically filed false income tax returns for clients that reported fictitious businesses and claimed certain tax credits, including the Earned Income Tax Credit, to generate inflated tax refunds. Tedla and her co-conspirators charged their clients different fees that depended on the size of the fraudulent refund. In 2016, Tedla also filed a false tax return for herself that underreported gross receipts from her business and taxable income. From 2012 through 2016, Tedla caused a tax loss to the IRS of approximately $171,534.¹⁰ [Emphasis added.]

A New Jersey man was sentenced yesterday to 29 months in prison for evading taxes and not filing income tax returns. According to court documents and evidence presented at trial, Jonathan Michael worked as a crane mechanic in the machine shop at the Port Newark Container Terminal. In 2014, after decades of filing tax returns and paying his taxes, Michael gave his employer a fraudulent IRS Form W-4, Employee Withholding Allowance Certificate, that claimed he was exempt from any federal income tax withholding. From 2014 through 2021, Michael did not file tax returns or pay any tax, even though he earned over $2.5 million in wages. According to evidence presented at the sentencing hearing, Michael’s conduct resulted in a tax loss to the IRS of $656,740.¹¹ [Emphasis added.]

A Minnesota businessman was sentenced today to 21 months in prison for evading the payment of federal individual income taxes he owed for the years 2007 through 2019. According to court documents and statements made in court, Robert Wayne Schlosser owned and operated Custom Christmas Lighting, a business that installs Christmas lighting, special event lighting and decoration displays for its customers. In 2018, Schlosser filed for bankruptcy and listed the IRS as a creditor. At that time, Schlosser had unpaid debts due to the IRS going back to 2007. As part of his bankruptcy, Schlosser was required to sign and file, under penalty of perjury, a bankruptcy petition and schedules providing information regarding his assets, income and other financial affairs. But the schedules he filed contained materially false statements and omissions regarding his assets and income. Schlosser also testified during bankruptcy proceedings and made materially false statements, specifically about his ownership of two speedboats. Schlosser evaded payment of his federal income taxes by filing false bankruptcy schedules and making false statements during bankruptcy proceedings that concealed assets from the IRS. Schlosser’s conduct resulted in a total tax loss to the IRS of $429,848.¹² [Emphasis added.]

All these cases involve conduct that is much more culpable and less public spirited than Littlejohn’s.

There are three reasons why tax evaders should be punished more severely than leakers rather than less.

First, as the summaries emphasize, tax evaders cause actual revenue loss to the government, and the severity of the sentence is linked to the size of the loss. Tax leakers like Littlejohn do not cause any revenue loss.

Second, prison sentences for tax evaders have a deterrence value because, unlike with leaking tax returns, it is hard for the IRS to discover the conduct. Small businesses are particularly hard to audit because there is no withholding or information reporting on their income, and even when there is information reporting (like in some of the above cases), it is not easy for the IRS to detect false W-2s and W-4s. Prison sentences handed down when the IRS does discover the conduct may have an effect in persuading other taxpayers not to do the same.

There is also a big difference between leaking tax information and tax evasion in the number of potential violations and the violators escaping punishment. The universe of potential violators leaking tax information is infinitesimal compared with the universe of potential tax evaders. And the number of potential violators escaping punishment for leaking tax information is close to zero, while the number of evaders escaping punishment is huge.

Third, from a fairness perspective, it is important that the IRS combat tax evasion by the rich because doing so bolsters the public perception that the system is fair and therefore that they should pay their taxes. Going after Littlejohn, on the other hand, creates the perception that the system protects the interests of the superrich taxpayers whose returns he leaked, some of whom are suing the IRS for a breach of privacy.¹³

Finally, lighter sentences are also common in cases involving massive leaks of private information. If what we care about is harm to individual privacy interests, the former chief security officer of Uber was sentenced in 2023 to 3 years of probation for covering up data breaches that involved the user records of millions.¹⁴ Also, in January three Department of Homeland Security employees were sentenced for stealing, inter alia, personally identifiable information from government databases and disclosing it to software companies overseas. They were sentenced to shorter terms of imprisonment (4 and 18 months) or probation (2 years).¹⁵

As Alex Zhang wrote, privacy cannot be an overriding principle that trumps all other considerations, especially regarding the superrich:

At three critical junctures — the Civil War, the 1920s, and the 1930s — Congress made certain tax records available for public inspection, and newspapers published the incomes of the billionaires of the time. Today, Finland, Norway, and Sweden all allow a significant degree of disclosure of individual tax data. This Article intervenes in the tax-confidentiality debate by building a novel analytical framework of fiscal citizenship. Until now, scholars have focused on compliance — whether publicity incentivizes honest reporting of income, and if it does, whether compliance gains outweigh the intrusion into a generalized notion of the taxpayer’s right to privacy. But the choice between confidentiality and transparency implicates more than just compliance. It rests on the taxpayers’ dynamic interactions with the fiscal apparatus of a state that aspires to democracy and egalitarianism. This Article constructs such a model. It posits that individual fiscal citizens play the roles of reporters, funders, stakeholders, and policymakers in the tax system. Within these roles, transparency and privacy have distinct valences. And the degree to which any taxpayer partakes in each role depends both on her own income and on the extent of income inequality within the community structured by federal taxation. This Article’s taxonomy of taxpayers’ fiscal interactions with the state suggests that public disclosure is more appropriate for ultra-wealthy taxpayers in times of high economic inequality. The Article thus provides insights to help policymakers design public-disclosure regimes that cohere with the norms implicit in our fiscal social contract with the state.¹⁶

Littlejohn is appealing his sentence. The D.C. Circuit should shorten it to the 10 months recommended by the sentencing guidelines, which is sufficient punishment. If that does not happen, President Biden should commute his sentence to time served.