Prosecutors' Slip Keeps Money in Limbo

Court Refuses Restitution Order for Mogul, Says Plea Deal Cites Incorrect Law

For seven years, federal prosecutors accused Washington telecommunications mogul Walter C. Anderson of trying to outsmart the government out of more than $200 million in federal and local taxes.

This week, Anderson was sentenced to nine years in prison. But he still managed to outfox the government one last time.

Because of a mistake prosecutors made in the plea agreement they struck with Anderson, the Internal Revenue Service cannot get a court order requiring him to pay an estimated $140 million in restitution for his unpaid federal taxes. Such an order would have required Anderson to do his best to pay up once he is free or risk more prison time.

Instead, the IRS must rely solely on more cumbersome -- and less threatening -- civil proceedings to try to tap the money.

The problem was in the paperwork. Prosecutors in the U.S. attorney's office and the Justice Department's tax division failed to call for Anderson to serve a period of probation after his prison sentence -- a routine requirement in most plea agreements. Tax law would allow the court to order restitution of taxes only as part of Anderson's probation, a federal judge ruled Tuesday.

Without a judge's restitution order -- and the threat of more jail time -- the IRS may face difficulty in getting back much of the money.

"This is a very poorly drafted agreement," U.S. District Judge Paul L. Friedman told the two prosecutors, Karen E. Kelly and Susan B. Menzer.

Anderson, 53, signed the plea deal in September. He then pleaded guilty to tax fraud and evasion.

The central flaw was pointed out by Anderson's attorney, Assistant Federal Public Defender Michelle M. Peterson, on Friday, the third day of Anderson's sentencing hearing. Friedman said Tuesday that he had to reluctantly agree that Peterson was right and that prosecutors cited the wrong law -- one relating to fines rather than restitution -- in the plea agreement.

"They ought to have been more careful in drafting it if they wanted him to be paying restitution," Peterson said.

It was an embarrassing setback in a case against a man the government has labeled the biggest tax cheat in U.S. history. Anderson's arrest two years ago was announced by the IRS commissioner himself, who said it showed that even the richest Americans will be held to "the same standards of honesty."

Channing Phillips, a spokesman for the U.S. attorney's office, said the plea agreement "should have cited the correct statute" but added that the government thinks the court still had the power to order restitution.

"Nevertheless, the fact remains that the IRS has adequate and ample civil remedies to recoup the owed monies, which are, in some respects, more efficient and quicker because the IRS would not have to wait for the defendant to serve out the sentence before . . . collecting those monies," Phillips said.

IRS spokeswoman Peggy Thomas said the agency would do "everything in our power" to get the money.

At the same time, the government has doubts about whether Anderson has any sizable assets hidden abroad that could be used to pay up, according to two law enforcement sources familiar with the case. They spoke on condition of anonymity because of the fragile state of the restitution issue.

Anderson has admitted he relied on aliases, shell corporations, offshore tax havens and phony corporate officers to hide $365 million in income in 1998 and 1999. But he said he spent or lost most of it, and prosecutors have been unable to find it.