                 FOR PUBLICATION
 UNITED STATES COURT OF APPEALS
      FOR THE NINTH CIRCUIT

UNITED STATES OF AMERICA,                 No. 08-10235
                Plaintiff-Appellee,          D.C. No.
               v.                         CR-02-00225-
ANDY S.S. YIP,                                DAE-1
             Defendant-Appellant.
                                           OPINION

       Appeal from the United States District Court
                for the District of Hawaii
        David A. Ezra, District Judge, Presiding

                  Argued and Submitted
           October 13, 2009—Honolulu, Hawaii

                  Filed January 13, 2010

      Before: Robert R. Beezer, Susan P. Graber, and
           Raymond C. Fisher, Circuit Judges.

                 Opinion by Judge Graber




                            981
984                    UNITED STATES v. YIP
                           COUNSEL

Theodore Y. H. Chinn, Honolulu, Hawaii; and Howard T.
Chang, Honolulu, Hawaii, for the defendant-appellant.

Leslie E. Osborne, Jr., Assistant United States Attorney,
Honolulu, Hawaii, for the plaintiff-appellee.


                            OPINION

GRABER, Circuit Judge:

   Defendant Andy S.S. Yip operated an “off-the-books” busi-
ness selling watches. He failed to report the income to the
Internal Revenue Service (“IRS”) or to disclose his foreign
bank accounts. He then conspired to keep the IRS from recov-
ering the unpaid taxes. Defendant now stands convicted of
one count of conspiracy to defraud the United States, one
count of filing a false tax return, and two counts of failure to
report foreign financial agency transactions. He also pleaded
guilty to four additional counts of filing a false tax return. On
appeal, he challenges both his convictions and his sentence.
In particular, he contends that the district court erred in its cal-
culation of tax loss and in its application of a sentencing
enhancement for obstruction of justice. In this opinion, we
hold that the district court properly included Defendant’s
unpaid state taxes in the tax loss computation on which his
term of imprisonment and his restitution order were based and
that Defendant was not entitled to an imputed deduction for
his unpaid state taxes. We also hold that the district court
properly applied the sentencing enhancement because Defen-
dant’s actions obstructed the IRS audit. In a separate memo-
randum disposition filed this date, we reject Defendant’s
challenges to his convictions, but hold that the district court
made several errors in sentencing him. We therefore vacate
his sentence and remand for resentencing.
                        UNITED STATES v. YIP                         985
       FACTUAL AND PROCEDURAL HISTORY

   Defendant owned a legitimate business in Hawaii called A
& E Creations. He also operated an off-the-books business
that primarily sold watches. On his federal and state tax
returns from 1995 to 1998, Defendant failed to report the
income from his off-the-books business.

   Defendant also opened bank accounts in Hong Kong in his
and his wife’s names. Defendant’s 1998 and 1999 tax returns
claimed that he did not have control over any foreign financial
accounts. Defendant also failed to file, in 1998 and 1999, the
Treasury form that is required when a taxpayer has an interest
in a foreign account.

   In 1997, IRS Agent Emerald Liburd began a civil audit of
Defendant’s 1995 tax return that later expanded to include his
tax returns from following years. At Defendant’s initial inter-
view with Agent Liburd, he told her that he had received a
small loan from his father and that he had no foreign bank
accounts or foreign transactions. At a follow-up meeting,
Defendant and his accountant provided domestic bank state-
ments to Agent Liburd. After analyzing the statements, Agent
Liburd concluded that there were unexplained deposits into
Defendant’s personal accounts of more than $600,000 in
1995. Agent Liburd requested an explanation of these depos-
its. Defendant then embarked on a campaign to convince the
IRS that the funds had come from personal loans.1

   Defendant provided Agent Liburd in March of 1998 with
four promissory notes, allegedly documenting loans to Defen-
dant from Eriko Dmitrovsky, along with a business card con-
taining Dmitrovsky’s contact information. Six months later,
Defendant sent Agent Liburd four additional promissory
  1
   Loans do not constitute taxable income. Comm’r v. Tufts, 461 U.S.
300, 307 (1983). Thus, had the funds been loan proceeds, Defendant
would not have been required to report them as income on his tax returns.
986                   UNITED STATES v. YIP
notes, one from Dmitrovsky and one each from three other
friends. Defendant also gave Agent Liburd an analysis of his
bank accounts purporting to show that the unexplained depos-
its originated in loans. Eventually, Defendant claimed that a
fifth individual had also loaned him money. After the IRS
investigation began, Defendant even made ostensible pay-
ments on the loans. In June of 1999, Agent Liburd concluded
that Defendant’s story was implausible, closed the civil audit,
and referred the case to IRS criminal fraud investigators.

   On September 22, 1999, IRS Criminal Investigator Gregory
Miki informed Defendant that he was now under criminal
investigation. IRS agents interviewed Defendant’s purported
lenders in the United States and abroad, finding various
inconsistencies surrounding the alleged loans. In 2002, Inves-
tigator Miki finished his investigation and referred the case to
the Tax Division of the Justice Department. A grand jury
indicted Defendant in 2002 for income tax fraud; the indict-
ment was later amended to include additional counts of filing
a false tax return, failure to declare a foreign bank account,
and conspiracy to defraud the United States.

   Defendant pleaded guilty to four counts of filing a false tax
return in violation of 26 U.S.C. § 7206(1). The government
dismissed one count of filing a false tax return. Defendant
went to trial on the remaining counts. A jury convicted Defen-
dant of one count of conspiracy to defraud the United States
in violation of 18 U.S.C. § 371, one count of filing a false tax
return in violation of 26 U.S.C. § 7206(1), and two counts of
failure to report foreign financial agency transactions in viola-
tion of 31 U.S.C. §§ 5314, 5322(b) and 31 C.F.R. §§ 103.24,
103.27(c), (d).

   At sentencing, the government included in the calculation
of tax loss caused by Defendant’s conduct the Hawaii state
taxes that Defendant had failed to pay on the unreported
income. Defendant objected to the inclusion of unpaid state
taxes, both because he contended that tax loss for sentencing
                      UNITED STATES v. YIP                   987
purposes is limited to federal tax loss and because the statute
of limitations had expired for the state tax violations. In addi-
tion, Defendant argued that if the tax loss included the state
taxes, he was entitled to credit for a matching deduction on
his federal income tax returns for payment of state taxes. His
theory was that, had he reported the income honestly and paid
the state taxes due on it, the amount of federal tax that he
owed would have been reduced by the deduction. Therefore,
the total tax loss caused by his fraudulent returns was actually
smaller than the sum of the federal and state income taxes
corresponding to the relevant amount of unreported income.
The district court rejected these objections, calculating the
unpaid state taxes as a component of tax loss and refusing to
adjust the tax loss for the hypothetical deduction. The district
court estimated the combined federal and state tax loss attrib-
utable to Defendant’s crimes at $1,052,995.

  Defendant also objected to a proposed sentencing enhance-
ment for obstruction of justice. Defendant argued that he sub-
mitted the false promissory notes and the false bank deposit
analysis during the tax audit, rather than during a criminal
investigation, and that obstruction of the audit could not sup-
port the enhancement. The district court rejected this argu-
ment as well. Accordingly, the district court increased
Defendant’s offense level under § 3C1.1 of the 2001 United
States Sentencing Guidelines.

   The district court sentenced Defendant to 67 months’
imprisonment on the counts of conspiracy and failure to file
the Treasury form on his foreign bank accounts, and 36
months’ imprisonment on the counts of filing a false tax
return, with all terms to run concurrently. The district court
also imposed restitution in the amount of $1,758,835. Defen-
dant timely appeals.

                 STANDARD OF REVIEW

  We review de novo the district court’s interpretation of the
Sentencing Guidelines. United States v. Garro, 517 F.3d
988                   UNITED STATES v. YIP
1163, 1167 (9th Cir. 2008). We have noted an intracircuit
conflict as to whether the standard of review for application
of the Guidelines to the facts is de novo or only for abuse of
discretion. United States v. Rivera, 527 F.3d 891, 908 (9th
Cir.), cert. denied, 129 S. Ct. 654 (2008). As in Rivera, we
need not resolve that conflict here, because the choice
between those standards does not affect the outcome of this
appeal. Id.

                        DISCUSSION

A.     Unpaid State Taxes

  1.    Inclusion of State Taxes in Tax Loss Calculation

   [1] Defendant first challenges the district court’s calcula-
tion of the tax loss resulting from his crimes. The Sentencing
Guidelines recommend a longer sentence for tax evasion or
tax fraud when the amount of unpaid tax is higher. U.S.S.G.
§§ 2T1.1(a)(1), 2T4.1. Therefore, the Guidelines direct a dis-
trict court to determine the tax loss, which is “the object of the
offense (i.e., the loss that would have resulted had the offense
been successfully completed).” Id. § 2T1.1(c)(1). Defendant
contends that “tax loss” is restricted to the amount of unpaid
federal taxes. We reject his argument and hold that tax loss
may properly include unpaid state taxes.

   [2] In United States v. Newbert, 952 F.2d 281, 284 (9th Cir.
1991), we approved a sentencing calculation that considered
“non-federal conduct.” The defendant argued that some of his
relevant conduct in submitting falsified travel vouchers may
have violated state, but not federal, law. Id. Nevertheless, we
reasoned that the text of the sentencing provisions at issue,
U.S.S.G. § 1B1.3(a)(2), (a)(3), directed the court to consider
“all acts that were part of the same course of conduct or com-
mon scheme or plan, as well as all harm that resulted from
those acts.” Newbert, 952 F.2d at 284. Therefore, we held that
“conduct which could be the basis of state prosecution may be
                     UNITED STATES v. YIP                   989
considered for sentencing purposes on a federal conviction for
other conduct which was part of the same common scheme or
plan.” Id. at 285.

   [3] To be sure, Newbert was not a tax loss case. But the
same reasoning applies to § 2T1.1. Application note 2 accom-
panying § 2T1.1 similarly instructs a court to consider “all
conduct violating the tax laws” (emphasis added), rather than
conduct violating the federal tax laws. Thus, tax loss may
include the unpaid state taxes resulting from a defendant’s
failure to report the same income to both federal and state tax
authorities.

   Resisting this conclusion, Defendant argues that incorporat-
ing state tax loss into sentencing undermines the Guidelines’
goal of uniformity in sentencing because the amount of state
tax loss will differ depending on state tax rates. But precisely
because state tax rates differ, a taxpayer failing to report the
true extent of his income actually causes differing degrees of
loss or harm in different states. The Guidelines “take account
of a number of important, commonly occurring real offense
elements such as . . . the amount of money actually taken,”
instead of sentencing only on the elements of the offense.
U.S. Sentencing Guidelines Manual at 6. Thus, considering
state tax loss in sentencing is consistent with the approach of
the Sentencing Guidelines. Moreover, in adopting the rule that
§ 2T1.1 may include state tax loss, we join all the other cir-
cuits that have considered the issue. United States v. Maken,
510 F.3d 654, 656-59 (6th Cir. 2007); United States v. Bau-
com, 486 F.3d 822, 829 (4th Cir. 2007), vacated on other
grounds, 128 S. Ct. 870 (2008); United States v. Powell, 124
F.3d 655, 664-66 (5th Cir. 1997); see also United States v.
Fitzgerald, 232 F.3d 315, 318 (2d Cir. 2000) (per curiam)
(affirming tax loss calculation that included city and state tax
evasion); United States v. Schilling, 142 F.3d 388, 394 (7th
Cir. 1998) (affirming sentence computed in part on unpaid
state taxes).
990                   UNITED STATES v. YIP
   [4] Defendant next argues that, even if tax loss may include
unpaid state taxes, the district court should not have consid-
ered the Hawaii tax losses in his case because the prosecution
of his state tax violations is time-barred under Hawaii law. He
relies on the phrasing of our holding in Newbert, in which we
wrote that the district court may consider “conduct which
could be the basis of state prosecution.” 952 F.2d at 285. His
reliance is misplaced. Newbert approved of sentencing that
considered conduct that violated state law, but did not address
any statute of limitations issues. See R.A.V. v. City of St. Paul,
505 U.S. 377, 387 n.5 (1992) (“It is of course contrary to all
traditions of our jurisprudence to consider the law on [a] point
conclusively resolved by broad language in cases where the
issue was not presented or even envisioned.”). Furthermore,
we have already held that relevant conduct under § 1B1.3
may include conduct whose prosecution is precluded by the
statute of limitations. See United States v. Williams, 217 F.3d
751, 753-54 & n.7 (9th Cir. 2000) (joining eight other circuits
in so holding). Unpaid state taxes may be included in the cal-
culation of tax loss whether or not the statute of limitations
prevents the state from prosecuting a defendant for his viola-
tions of its tax laws. The district court properly included
Defendant’s unpaid state taxes in its computation of tax loss.

  2.   Deduction for State Taxes

   Defendant argues that, if his unpaid state taxes are included
in tax loss, he is entitled to a reduction in the total tax loss
attributed to him by the amount of the deduction that he could
have taken on his federal tax returns for payment of those
state taxes. We are not persuaded.

   Fifteen years ago, we held that, in calculating tax loss, no
allowance was to be made for unclaimed potential deductions.
United States v. Valentino, 19 F.3d 463, 464 (9th Cir. 1994).
Valentino, however, involved an earlier version of the tax loss
provision, which authorized a calculation method grounded in
“the nature and magnitude of the false statements made,”
                        UNITED STATES v. YIP                         991
U.S.S.G. § 2T1.3 cmt. background (1992), rather than in the
magnitude of the tax loss that materialized as a result. Valen-
tino, 19 F.3d at 465. Indeed, application note 4 for § 2T1.1
stated in 1992 that this method “should make irrelevant the
issue of whether the taxpayer was entitled to offsetting adjust-
ments that he failed to claim.”

   In 1993, Amendment 491 to the Sentencing Guidelines
removed the reference to offsetting adjustments and stated
that the Guidelines focus on “the amount of loss that was the
object of the offense.” U.S.S.G. § 2T1.1 cmt. background.
The revised version of § 2T1.1 instructed the district court to
treat the tax loss “as equal to 28% of the unreported gross
income . . . unless a more accurate determination of the tax
loss can be made.” Id. § 2T1.1(c)(1) note A.

   Relying on the latter clause, the Second Circuit has con-
cluded that, under the amended Guidelines, tax loss should be
adjusted for “ ‘legitimate but unclaimed deductions.’ ” United
States v. Gordon, 291 F.3d 181, 187 (2d Cir. 2002) (quoting
United States v. Martinez-Rios, 143 F.3d 662, 671 (2d Cir.
1998)). Several other circuits, however, disagree. United
States v. Clarke, 562 F.3d 1158, 1164 (11th Cir. 2009), cert.
denied, 2009 WL 3481902 (U.S. Dec. 7, 2009) (No. 09-514);
United States v. Delfino, 510 F.3d 468, 472 (4th Cir. 2007),
cert. denied, 129 S. Ct. 41 (2008); United States v. Phelps,
478 F.3d 680, 681-82 (5th Cir. 2007) (per curiam); United
States v. Chavin, 316 F.3d 666, 677 (7th Cir. 2002); United
States v. Spencer, 178 F.3d 1365, 1368 (10th Cir. 1999).
These sister circuits have offered three reasons to refuse to
allow a defendant to reduce tax loss by the amount of
unclaimed deductions. First, deductions are not permissible if
they are unintentionally created or are unrelated to the tax vio-
lation, because such deductions are not part of the “object of
the offense” or intended loss.2 Clarke, 562 F.3d at 1164;
  2
   The deductions at issue in Defendant’s case are, of course, related to
his offense. Therefore, we do not rely on this reason in our adjudication
of his appeal.
992                   UNITED STATES v. YIP
Phelps, 478 F.3d at 682; Chavin, 316 F.3d at 677; see also
United States v. Blevins, 542 F.3d 1200, 1203 (8th Cir. 2008)
(noting that the defendant’s unclaimed deductions were unre-
lated to his tax fraud, but declining to reach issue of whether
unclaimed deductions may ever reduce calculated tax loss),
cert. denied, 129 S. Ct. 1024 (2009). Second, the revisions of
Amendment 491 were so extensive that the mere fact that the
revised § 2T1.1 does not include the former “offsetting adjust-
ments” reference fails to demonstrate that deductions are now
permissible. Chavin, 316 F.3d at 678. Finally, our sister cir-
cuits reject the nebulous and potentially complex exercise of
speculating about unclaimed deductions. Delfino, 510 F.3d at
473; Chavin, 316 F.3d at 678. The Tenth Circuit observed that
it does not interpret the Guidelines “as giving taxpayers a sec-
ond opportunity to claim deductions after having been con-
victed of tax fraud. . . . Rather, we are merely assessing the
tax loss resulting from the manner in which the defendant
chose to complete his income tax returns.” Spencer, 178 F.3d
at 1368.

   We are persuaded by the Fourth, Fifth, Seventh, Tenth, and
Eleventh Circuits. The amendment to § 2T1.1’s application
notes is irrelevant to our analysis. It is true that the notes no
longer state that § 2T1.3’s alternative minimum standard
“may be easier to determine, and should make irrelevant the
issue of whether the taxpayer was entitled to offsetting adjust-
ments that he failed to claim.” But this sentence was deleted
when § 2T1.3 was deleted in its entirety from the Guidelines.
As a reference to § 2T1.3 was no longer logical, such a
change does not show an intent to allow unclaimed deduc-
tions sufficient to undercut our decision in Valentino.

   [5] Section 2T1.1 does permit “a more accurate determina-
tion” of tax loss than the 28% approximation. A more accu-
rate determination might involve applying a different tax rate
or incorporating exemptions and deductions legitimately
claimed by the taxpayer on a tax return. But that section does
not require a court to speculate about tax deductions that the
                          UNITED STATES v. YIP                          993
taxpayer chose not to claim.3 We hold that § 2T1.1 does not
entitle a defendant to reduce the tax loss charged to him by
the amount of potentially legitimate, but unclaimed, deduc-
tions even if those deductions are related to the offense.

   [6] In Defendant’s case, he cannot even argue that the state
taxes are legitimate, but unclaimed, deductions. The state
taxes are not legitimate deductions because he did not pay
them. A cash-basis taxpayer may deduct state and local taxes
“for the taxable year within which paid.” 26 C.F.R. § 1.164-
1(a). The district court properly refused to reduce the tax loss
attributed to Defendant to account for an imputed deduction
from his unpaid state taxes.

B.    Obstruction of IRS Audit

   Defendant also disputes the district court’s two-level
enhancement of his sentence for obstruction of justice.
Among the acts that the district court cited as supporting
application of the enhancement were Defendant’s provision of
four false promissory notes and a false bank deposit analysis
to Agent Liburd during the audit. Section 3C1.1 of the 2001
version of the Sentencing Guidelines authorized a district
court to increase a defendant’s offense level by two levels if
the defendant “willfully obstructed or impeded, or attempted
to obstruct or impede, the administration of justice during the
course of the investigation, prosecution, or sentencing of the
instant offense of conviction” and if the conduct related to a
qualifying offense. Here, Defendant asserts that the audit was
not a criminal investigation of the offense of conviction and,
thus, that the enhancement was improper.
  3
    We note, for instance, that a taxpayer is entitled to deduct either state
income tax or state sales tax, but not both. 26 U.S.C. § 164(b)(5)(A).
Some of the states in our circuit impose both an income tax and a sales
tax. Reconstructing a hypothetical federal tax return for a resident of one
of these states would require selecting between these potential deductions.
994                      UNITED STATES v. YIP
   [7] A defendant’s conduct before an investigation begins
does not constitute obstruction of justice under the version of
§ 3C1.1 that was in effect before 2006.4 For instance, in
United States v. Rising Sun, 522 F.3d 989, 996-97 (9th Cir.
2008), we held that the enhancement could not be applied to
a murder defendant who, on the night of the killings, had
attempted to destroy evidence and had threatened his brother
to keep him from talking to his girlfriend about the night’s
events. The enhancement “could only apply if an investiga-
tion or prosecution was already in progress when the obstruc-
tive actions were taken.” Id. at 995. Similarly, in United
States v. DeGeorge, 380 F.3d 1203, 1222 (9th Cir. 2004), we
held that the enhancement did not apply to perjury committed
during a civil suit between a defendant and his insurance com-
pany, where the criminal investigation of the defendant’s mail
fraud did not begin until after the civil suit ended. Until today,
we have never decided whether an IRS audit may constitute
an investigation for the purposes of § 3C1.1. We now hold
that it may.

   Section 3C1.1 itself does not define an “investigation.” But
in United States v. Luca, 183 F.3d 1018, 1022 (9th Cir. 1999),
we affirmed application of the enhancement to the submission
of false documents to a state administrative agency that was
investigating a defendant’s Ponzi scheme. We found it signifi-
cant in Luca that the agency was investigating “the same
offense” that led to the defendant’s federal conviction. Id.
Two other circuits have likewise held that obstruction during
a civil investigation of the same conduct that forms the basis
of a conviction suffices for application of the enhancement.
The First Circuit held that obstruction during administrative
  4
    In 2006, Amendment 693 to the Sentencing Guidelines replaced the
phrase “during the course of the investigation” in § 3C1.1 with “with
respect to the investigation” and added commentary explaining that con-
duct occurring before the start of an investigation may be covered “if [the
conduct] was purposefully calculated, and likely, to thwart the investiga-
tion.” However, this amendment was a substantive change to the Guide-
lines and cannot be applied retroactively. Rising Sun, 522 F.3d at 997.
                       UNITED STATES v. YIP                      995
audits by Medicare and Medicaid may trigger the enhance-
ment, “so long as the investigation which has been obstructed
has a sufficient connection to the offense of conviction.”
United States v. McGovern, 329 F.3d 247, 252 (1st Cir. 2003).
And the Second Circuit, after noting the extensive overlap
between civil and criminal investigations of securities fraud,
affirmed application of the enhancement to perjury committed
during a civil investigation by the Securities and Exchange
Commission. United States v. Fiore, 381 F.3d 89, 94 (2d Cir.
2004).

   [8] An IRS audit is an official investigation that may be the
first step leading to a criminal conviction for tax violations.
United States v. Peters, 153 F.3d 445, 447 (7th Cir. 1998).
The audit places a taxpayer on notice that the government is
looking into the accuracy and propriety of his or her tax
returns. Evidence gathered during such an audit properly may
be transferred to prosecutors. United States v. McKee, 192
F.3d 535, 544 (6th Cir. 1999). The IRS may distinguish
between the procedures to be followed during the civil and
criminal phases of an audit, Peters, 153 F.3d at 447, but to a
taxpayer under suspicion, the latter merely represents an
escalating development in the same underlying investigation.
Obstruction during an IRS audit justifies enhancing a defen-
dant’s sentence for obstruction “during the course of the
investigation.” U.S.S.G. § 3C1.1 (2001).

                         CONCLUSION

  [9] For these reasons, the district court properly charged
Defendant with the full amount of his unpaid state taxes and
properly enhanced his sentence for obstruction of justice.

  Convictions AFFIRMED;             sentence    VACATED          and
REMANDED.5
  5
   In a separate memorandum disposition, see supra, at 984, we vacate
Defendant’s sentence and remand for resentencing to address certain
defects in his sentence.
