When the Taxman Listens In

The curious journey of wiretap evidence from criminal investigations to tax disputes—and the courts that decide where to draw the line

Al Capone didn’t go down in a hail of bullets. Raj Rajaratnam, the Sri Lankan-born billionaire who ran one of Wall Street’s most successful hedge funds, wasn’t caught red-handed passing insider tips across a trading floor. Both men were ultimately undone by something far more prosaic: paper trails and, in Rajaratnam’s case, thousands of hours of recorded telephone conversations.

The question of whether wiretap evidence belongs in tax cases sits at one of the law’s most fascinating crossroads—where criminal procedure meets administrative process, where the state’s legitimate interest in collecting revenue collides with the individual’s right to privacy. It might seem like a matter for specialists, the sort of thing argued in footnotes and law-review articles. But as tax authorities grow more sophisticated and more aggressive, and as the boundaries between criminal and civil enforcement continue to blur, the issue touches an expanding universe of taxpayers. Including, as it happens, quite a few in Poland.

• Further reading: The Exclusionary Rule in Tax Proceedings: Judicial Scrutiny of Wiretap Evidence

I. The Global View: From Chicago to Lower Manhattan

A Curious Paradox

Here is a fact that surprises even seasoned tax lawyers: despite the steady growth in court-authorized wiretaps—American judges approved 2,297 intercepts in 2024, a nine-per-cent increase over the previous year—their use in pure tax-evasion cases remains vanishingly rare.

The reason is almost embarrassingly simple. Under Title III of the Omnibus Crime Control and Safe Streets Act of 1968, the statute that governs federal wiretapping, investigators may seek court authorization only for crimes enumerated in a closed list. Tax evasion isn’t on it. The F.B.I. cannot tap your phone merely because it suspects you of hiding income from the I.R.S.

This wasn’t an oversight. Congress made a deliberate choice, recognizing that tax crimes differ fundamentally from drug trafficking or terrorism. They leave extensive documentary evidence—returns, bank statements, invoices, contracts—and the I.R.S. Criminal Investigation division has spent decades perfecting the art of following that paper trail. The agency’s conviction rate hovers around ninety per cent, achieved almost entirely through traditional investigative methods.

The Accountant Who Caught Capone

The prosecution of Alphonse Capone remains the ur-text of financial forensics, a case study in what patient document analysis can accomplish without electronic surveillance. At the height of his power, Capone earned an estimated hundred million dollars annually—roughly one and a half billion in today’s money—from bootleg liquor, gambling, and prostitution. He maintained no bank accounts, signed no checks, held no property in his own name. He paid for everything in cash. He never filed a tax return.

Frank J. Wilson, a special agent with the Treasury Department’s Intelligence Unit, spent two years sifting through thousands of documents seized during raids on Capone’s establishments. The breakthrough came late one night when Wilson, working alone, discovered three bound ledgers that appeared to record the distribution of gambling profits. One entry read: “Frank paid $17,500 for Al.”

Wilson didn’t need a wiretap. He needed patience and the ability to follow the money—a methodology that remains the foundation of tax investigations worldwide. On October 17, 1931, Capone was convicted of tax evasion and sentenced to eleven years in federal prison.

The Galleon Case: Wiretaps Come to Wall Street

Seventy-eight years later, federal prosecutors in the Southern District of New York did something unprecedented. For the first time in the seventy-five-year history of American securities law, they deployed Title III wiretaps in an insider-trading investigation.

Raj Rajaratnam had built Galleon Group into a seven-billion-dollar hedge fund by, prosecutors alleged, cultivating a network of corporate insiders at Goldman Sachs, Intel, Google, and McKinsey & Company. He traded ahead of earnings announcements and mergers, generating tens of millions in illegal profits. The scheme depended on telephone conversations—quick tips passed between friends and former colleagues—that left almost no documentary trace.

How did prosecutors get around Title III’s limitations? They reframed the case. Rather than charging securities fraud, which isn’t a predicate offense for wiretapping, they alleged wire fraud, which is. Between March 2008 and October 2009, the F.B.I. intercepted 18,150 communications involving 550 individuals from ten different telephones.

The recordings proved devastating. Jurors heard Rajaratnam and his sources discussing confidential information in their own words—no inference required, no circumstantial chain to construct. On May 11, 2011, he was convicted on all fourteen counts and sentenced to eleven years in prison.

What Rajaratnam’s Defense Revealed

The Galleon case established precedent, but it also exposed the system’s vulnerabilities. Rajaratnam’s lawyers mounted a vigorous challenge, arguing that prosecutors had failed the “necessity” requirement—they hadn’t adequately demonstrated that traditional investigative techniques were insufficient. After all, the S.E.C. had been running a parallel civil investigation that had already amassed millions of documents.

Judge Richard Holwell found that prosecutors had been “reckless” in omitting this information from their wiretap application. He nonetheless declined to suppress the evidence, concluding that even full disclosure wouldn’t have changed the outcome. The standard for exclusion, it turned out, was high indeed.

The Swiss Exception

The great international banking scandals of the past two decades offer a striking counterpoint. The UBS affair (2007–2009), which shattered Swiss banking secrecy and reshaped offshore finance, relied almost entirely on a single whistle-blower.

Bradley Birkenfeld, a former UBS private banker, walked into the Department of Justice with internal training materials, client lists, and phone numbers for Geneva-based bankers. Remarkably, Birkenfeld explicitly offered to travel to Switzerland, meet with his former colleagues, and wear a wire. Prosecutors declined.

The reasons were practical: jurisdictional complications involving surveillance of foreign nationals on foreign soil, the sheer volume of documentary evidence already in hand, the costs and uncertainties of international electronic surveillance. UBS ultimately paid $780 million in penalties and surrendered information on 4,450 American account holders—all without a single intercepted conversation.

The Encryption Problem

Contemporary surveillance faces a growing technical obstacle. In 2024, 350 federal wiretaps encountered encryption, and eighty-nine per cent of those intercepts couldn’t be decoded. With the average wiretap costing between eighty and a hundred and eleven thousand dollars, and with an increasing proportion of intercepted communications proving unreadable, the economics of electronic surveillance are shifting. The paper trail, it seems, isn’t going anywhere.

II. The European Standard: Luxembourg Sets the Boundaries

European Union law doesn’t harmonize evidentiary rules in tax proceedings—that remains the province of member states. But the Court of Justice of the European Union has established outer boundaries that national tax authorities cannot cross.

The WebMindLicenses Case

The Court’s December 17, 2015, judgment in Case C-419/14, WebMindLicenses Kft., stands as the definitive statement on wiretap evidence in VAT disputes.

The facts were these: WebMindLicenses, a Hungarian company, had licensed know-how to Lalib, a company based in Madeira, Portugal. Hungarian tax authorities concluded that the arrangement was artificial, designed to exploit Portugal’s lower VAT rate. They assessed additional tax exceeding forty million euros—and they based their decision substantially on evidence obtained from a parallel criminal investigation: intercepted telephone calls and seized e-mails to which WebMindLicenses had been given no access.

The Court’s reasoning proceeded through several steps. First, EU law doesn’t categorically prohibit tax authorities from using evidence gathered in criminal proceedings (paragraph 68). But such use must respect the Charter of Fundamental Rights.

Second, Article 7 of the Charter, which protects private life, requires that any interception of communications be prescribed by law—law that is clear and precise—and that it be necessary and proportionate, with adequate safeguards against arbitrary action (paragraphs 71–77).

Third, the right of defense is a general principle of EU law. A taxpayer must have access to the evidence against him and an opportunity to respond before any adverse decision is taken, even if national law doesn’t explicitly require it (paragraph 84).

Fourth—and this is the critical holding—if a national court finds that a taxpayer was denied access to evidence or that evidence was obtained in violation of Article 7, the court must exclude that evidence. If the decision cannot stand without it, the decision must be annulled (paragraphs 89, 91).

The Dzivev Refinement

The Court’s January 17, 2019, judgment in Case C-310/16, Dzivev, addressed a more elemental defect. Bulgarian defendants in a VAT-fraud prosecution had been wiretapped under authorizations issued by the wrong court—a jurisdictional change had transferred competence to a specialized tribunal, but the previous court continued issuing orders.

The Court held that Article 325(1) TFEU, which obliges member states to combat fraud affecting the Union’s financial interests, does not preclude exclusion of wiretap evidence authorized by an incompetent court—even if that evidence is the only proof of guilt (paragraph 41).

The principle underlying the decision was stark: “The principle of legality and the rule of law constitutes one of the primary values on which the Union is founded, as attested by Article 2 TEU” (paragraph 34). The effectiveness of tax collection cannot justify departures from fundamental procedural guarantees.

The European Framework, Summarized

III. The Polish Standard: A Turning Point

For years, Polish law operated on an implicit assumption: if prosecutors transmitted materials to tax authorities, those materials arrived cloaked in a presumption of legality. If the Internal Security Agency or the police conducted a wiretap and forwarded transcripts to the revenue service, the tax officials took them at face value.

The Supreme Administrative Court’s February 7, 2019, judgment (I FSK 1860/17) disrupted that comfortable arrangement.

The Facts of the I. S.A. Case

I. S.A., a Polish company, stood accused of knowing participation in a VAT carousel—a fraud scheme in which goods circle through a chain of companies, with each transaction generating VAT refund claims that exceed any tax actually paid. Tax authorities disallowed input VAT deductions, treating the invoices as fictitious.

Central to the government’s case were transcripts of conversations intercepted by the Internal Security Agency—calls between I. S.A.’s employees and representatives of trading partners. The prosecutor’s office had transmitted these materials to the tax authorities. But I. S.A. never received the underlying recordings. The company saw only typed transcriptions and had no way to verify whether those transcriptions were complete or accurate.

The Court’s Holding

The Supreme Administrative Court announced what it called a “thesis”—a formal statement of the legal principle at stake:

Tax authorities receiving evidence—for example, intercepted conversations—obtained by other agencies must independently assess its legality: whether it was gathered in accordance with applicable law and under judicial supervision.

The Court explicitly rejected the prior consensus, invoking WebMindLicenses by name:

In light of the CJEU’s December 17, 2015, judgment, the view that previously dominated in administrative-court jurisprudence—that tax authorities are relieved of any obligation to assess the legality of evidence obtained through operational techniques and transmitted by the prosecutor’s office or other investigative agencies—cannot be sustained.

What Tax Authorities Must Now Verify

The Court specified the inquiries that revenue officials must undertake:

1. Formal compliance: Was the interception conducted in accordance with the procedural requirements of the governing statute (for example, the Law on the Internal Security Agency)?
2. Subject-matter jurisdiction: Was this a case in which the particular surveillance technique was legally available?
3. Judicial supervision: Did the wiretap proceed under the oversight of a common court, as required by law?
4. Constitutional standards: Was the interception consistent with the Constitutional Tribunal’s July 30, 2014, judgment (K 23/11), which struck down certain provisions governing operational surveillance?

Transcripts Are Not Enough

The Court added a requirement of considerable practical significance:

For tax authorities to make factual findings on the basis of conversation transcripts, they must have access to the recordings themselves, so that the recordings can be played back.

The reasoning was straightforward. Only with access to the original audio can the tax authority accurately establish the facts; only then can the taxpayer verify whether the written transcript faithfully represents what was said. A transcript alone—even one lawfully prepared—does not suffice as the basis for findings adverse to the taxpayer.

The Connection to Defense Rights

The Supreme Administrative Court tied its holding explicitly to European standards, quoting WebMindLicenses on the right of defense:

Addressees of decisions that perceptibly affect their interests must be in a position to make their views known on the matters on which the administrative authority intends to base its decision.

The corollary in Polish law is direct: if the tax authority denies a taxpayer access to the full wiretap materials—citing, for instance, Article 179 of the Tax Ordinance, which permits withholding of certain information—then the authority cannot use those materials against the taxpayer. Article 192 of the Tax Ordinance is unambiguous: a factual circumstance may be treated as proven only if the party had an opportunity to comment on the evidence.

Practical Implications

For Tax Authorities

The days of automatic reliance on prosecutorial transmissions are over. Before using wiretap evidence, revenue officials must investigate its provenance: the statutory basis for the interception, the competence of the authorizing body, the existence of judicial oversight, and consistency with Constitutional Tribunal precedent.

Transcripts are insufficient; access to source recordings is required.

And the taxpayer must see the evidence before any decision is made.

For Taxpayers and Their Counsel

In any case involving materials from criminal proceedings, demand proof that the evidence was lawfully obtained.

Remember that a transcript is an interpretation—only hearing the recording permits meaningful challenge.

Invoke Article 192: evidence to which the taxpayer has been denied access cannot support adverse findings.

Cite WebMindLicenses and Dzivev directly; they are binding standards in Polish administrative courts.

If an unfavorable tax decision rests on improperly obtained evidence, the EU-law violation can anchor an appeal.

The trajectory of these cases—from Capone’s ledgers to Rajaratnam’s wiretaps to the I. S.A. transcripts—traces an arc familiar from other areas of law. Governments acquire new investigative tools. They use those tools aggressively, sometimes too aggressively. Courts intervene to establish boundaries. The boundaries hold, more or less, until the next technological or institutional shift.

What makes the tax context distinctive is the nature of the stakes. Criminal defendants facing prison have long enjoyed robust procedural protections. Taxpayers facing assessments—even ruinous ones—historically received something less. The European and Polish courts are gradually closing that gap, insisting that the rule of law applies with equal force whether the state seeks to imprison you or merely to take your money.

It is, in the end, a matter of first principles. As the Court of Justice observed in Dzivev, the principle of legality is “one of the primary values on which the Union is founded.” Tax collection is important. It is not important enough to justify abandoning the safeguards that distinguish a lawful government from an arbitrary one.

Robert Nogacki

Founder and Managing Partner of Skarbiec Law Firm, recognized by Dziennik Gazeta Prawna as one of the best tax advisory firms in Poland (2023, 2024). Legal advisor with 19 years of experience, serving Forbes-listed entrepreneurs and innovative start-ups. One of the most frequently quoted experts on commercial and tax law in the Polish media, regularly publishing in Rzeczpospolita, Gazeta Wyborcza, and Dziennik Gazeta Prawna. Author of the publication “AI Decoding Satoshi Nakamoto. Artificial Intelligence on the Trail of Bitcoin’s Creator” and co-author of the award-winning book “Bezpieczeństwo współczesnej firmy” (Security of a Modern Company). LinkedIn profile: 18 500 followers, 4 million views per year. Awards: 4-time winner of the European Medal, Golden Statuette of the Polish Business Leader, title of “International Tax Planning Law Firm of the Year in Poland.” He specializes in strategic legal consulting, tax planning, and crisis management for business.