Intentional Errors & Tax Returns
What Are They and What Do They Have To Do with Money Laundering, Forfeiture, Structuring, Obstruction of Justice, False Statements and "Bad" Tax Returns
I. INTRODUCTION
Most clients do not (hopefully) include the attorney in the planning stages of intentionally erroneous tax returns and they may not immediately bring it to the attention of the attorney even when contacted by an agent (for, presumably, what starts out as a routine audit). In addition, most of these individuals do not really understand what can constitute a crime and almost none of them understand what the potential consequences can be. Unfortunately, many of the things that can occur at an early contact with the agent (or, worse, agents) can lead to irreparable harm. This outline is intended to provide a brief description of the many things (crimes) that can constitute tax crimes or be associated with them and then discuss basic strategies available as well as caution on those that give the practitioner the opportunity to share in the consequences of client's conduct ("if you were not there to drink the whiskey, don't help pay the bill").
II. TAX & RELATED CRIMES
(This is a general description, not a precise technical description). See: The Criminal Tax Manual (Department of Justice, Tax Division, Criminal Section), provides the detail for tax crimes in the "Reading Room" found at http://www.usdoj.gov/tax
1. "Pure" Tax Crimes.
A. 26 U.S.C. § 7201. (i) A willfully (knowingly intentional), (ii) wrong return, (iii) accomplished by an affirmative act, (iv) resulting in a substantial amount of additional tax due OR willfully not paying the tax you agree is due (U.S. v. Huebner, 48 F.3d 376 (9th Cir. 1994)). The tax can be income tax, payroll taxes (although normally Section 7202 is used) or estate taxes. Anyone that helps with this (even if not their return) can be guilty of it as well (aiding and abetting, 18 U.S.C. § 2). Can be done by under reporting income or over reporting "expenses" or too cleverly "hiding" money from the tax collector.
B. 26 U.S.C. § 7202. A (i) Willful (knowingly intentional) failure to, (ii) collect, account for and pay over, (iii) any tax.
C. 26 U.S.C. § 7203. A (i) Willful (knowingly intentional), (ii) failure to file a return, supply information or pay tax.
D, 26 U.S.C. § 7206(1). (i) Signing (and submitting) a (ii) Willful (knowingly intentional) Wrong (material U.S. v. Gaudin, 115 S.Ct. 2310 (1995)), (iii) return or other form that was signed under penalties of perjury.
E. 26 U.S.C. § 7602(2). Any person who (i) Willfully aids or assists, (ii) the preparation of a return, affidavit, claim or other document, (iii) that is fraudulent, (iv) as to any material (Gaudin, supra) matter arising under the Internal Revenue Code. This is the "return preparer" section and applies even if the person actually filing the return or providing the affidavit believes it to be correct.
F. 26 U.S.C. § 7212(a). Whoever (i) corruptly or by force, endeavors to intimidate or (ii) impede any (I.R.S. Officer) acting in an (iii) official capacity. Corruptly probably means "performed with the intent to secure an unlawful benefit for oneself or another", U.S. v. Massey, 2005 WL 1529703 (2005). In effect, this is an obstruction of justice section that can arise during an investigation. U.S. v. Popkin, 943 F.2nd 1535 (11th Cir. 1991) upheld a conviction of an attorney for forming a corporation to enable his client to, in effect, launder drug revenue through it.
Tax Crimes normally use a very restrictive definition of willful. It is defined as "a voluntary, intentional violation of a known legal duty, the specific intent to do something the law forbids." U.S. v. Pompino, 429 U.S. 10 (1976); U.S. v. Bishop, 412 U.S. 346 (1973). While it does not mean the Government must show that the act (or failure to act) was done for an evil or bad purpose, it does have to establish that the Defendant was aware of his/her obligations and that he/she knew he/she was violating a known legal duty, this proof is intended to require the subjective (not "reasonable") intent of the defendant. Cheek v. U.S., 498 U.S. 192 (1991); U.S. v. Harting, 879 F.2nd 765 (10th Cir. 1989); Zarzecki v. U.S., 112 S.Ct. 2273 (1992). Consider, however, the use of "Willful Blindness" instructions as well as U.S. v. Grunewald, 987 F.2nd 531, 536 (the jury may "consider the reasonableness of the defendant's asserted beliefs in determining whether the belief was honestly or genuinely held.").
While 26 U.S.C. § 6531 states that other than provided therein, the normal statute of limitations for criminal tax prosecutions is three years, the six year exception swallows the rule. Other than for informational filings (like 1099's) the statute of limitations forcriminal tax cases will be six years from the due date of the return or the date the return was actually filed (26 U.S.C. § 6531). In failure to file cases it is six years from the due date of the return.
2. Common "Associated Crimes".
A. 18 U.S.C. § 371. If (i) two or more persons (ii) conspire to either commit an offense against the United States or to defraud the United States...and (iii) one or more of such persons do any act to effect the object of the conspiracy. Upon conviction, each of the participants in the conspiracy can be responsible for the entire conspiracy impact. The conspiracy can include concealing tax crimes from investigation. Typically in tax cases such a conspiracy is a so-called "Klein Conspiracy" (U.S. v. Klein, 247 F.2nd 908 (2nd Cir. 1957) with the Government trying to show that the defendant(s) entered into an agreement to obstruct the lawful functions of the government by deceitful or dishonest means and at least one member committed the "overt" act. U.S. v. Caldwell, 989 F.2nd 1056 (9th Cir. 1993).
B. 18 U.S.C. § 1001. False Statement. The Supreme Court has made it clear that a false statement to an I.R.S. Agent, in the course of an examination, audit or criminal investigation, constitutes a separate crime. You do not have to be under oath to commit the crime, you must simply know you are dealing with an Agent in an investigation and falsely answer a question (Did you report all of your income or did you receive any payments in cash?; most people think they know the answer to those types of questions but that may not be a good answer in the end). Simply denying that they committed a crime (or the act that would be the crime), the so called exculpatory "no" response, is a separate crime. Brogan v. U.S., 118 S.Ct. 805 (1998).
C. 31 U.S.C. § 5324. Structuring. (What else am I supposed to do with the cash I did not report? As time goes on, wine, women & song are not enough). Depositing under $10,000 several times in an effort to prevent a report from being filed with the Treasury Department is structuring. It is illegal even if your client doesn't know it is illegal. Cash for this purpose means cash and any money orders, cashiers checks or similar items that are, individually, under $10,000. If you meet this requirement you can be found guilty of structuring and, the Government can then take all of the cash you structured (with little or no defense available other than a claim it is an "excessive fine" under the 8th Amendment to the Constitution). 11 U.S.C. § 5317. Of course, such a client paying his attorney means the attorney must file the Form 8300, 26 U.S.C. § 6050I. Failure to file the form can subject the attorney to a substantial fine (26 U.S.C. § 6721) and can constitute a failure to file crime under 26 U.S.
C §7203 (except here it is a Felony and attorney/client privileges and similar arguments to avoid filing have all been rejected) if, within 12 months, that client pays or deposits with the attorney over Ten Thousand Dollars in cash as defined above.
D. 18 U.S.C. §§ 286 & 287 (Conspiracy to make False Claims & False Claims), generally used relative to fraudulent refund schemes.
3. Rare and Painful.
There are a number of other sections that can be brought to bear in unusual cases, in addition to the above. Initially, and of concern to those representing potential defendants, in addition to Section 7212 noted above, prosecutions can be brought for obstruction of justice under 18 U.S.C. §§ 1510 and 1505. It is illegal to corruptly impede or endeavor to influence, obstruct or impede. In other words, there is a limit to what one can do to deflect the investigation and you do not have to succeed to be guilty (trying is good enough). At some point (and a point not to get too close to) care must be exercised to avoid being part of a conspiracy to conceal a crime by affirmatively asserting a defense by the "creation" of evidence (oral or written).
Additional charges relating to mail or wire fraud, RICO, money laundering and forfeiture are not normally permitted by Main Justice in criminal tax cases (absent structuring) where the source of funds are otherwise legitimate source funds. However, Main Justice will approve (See Tax Division Directive 128), cases including those charges if they involve illegal source income and/or allegedly corrupt return preparers or those promoting improper tax shelters (in other words, relatively wide spread, impacting a number of taxpayers). Individuals caught up in those types of accusations find that in addition to normal tax and conspiracy charges, they will likely also face, if available, charges such as conspiracy to structure (18 U.S.C. § 1956(h)); money laundering (18 U.S.C.
§§ 1341 and/or 1957); obstruction of justice (18 U.S.C. § 1503); wire fraud (18 U.S.C. § 1343); and forfeiture (18 U.S.C. §§ 982 & 853). Obviously in such cases the financial ruin of the defendant(s) is the objective and, since forfeiture "relates back", can the attorney establish that the source of his/her fees was not clearly from such illegal sources? Trying cases for fun rather than money really isn't that much fun and paying it back after you had it and spent it is even less fun.III. THE CHANGING ENVIRONMENT OF INVESTIGATIONS
Historically, investigations into tax crimes that did not involve illegal source income were handled, initially, by Internal Revenue Service (Criminal Investigation Division or "CI") Special Agents, with their "work" summarized into a Special Agent's Report ("SAR"). In turn the SAR would be reviewed for approval by the Chief of CI in that office, if approved sent to Internal Revenue Service attorneys (then generally referenced as District Counsel attorneys) where a conference was available. Assuming approval, that case would then be sent on to the Tax Division, Criminal Section of the Justice Department (where, again, a conference could be obtained) which would determine if the case would go forward.
Following the reorganization of the Internal Revenue Service (IRS Notice N(30)000-348 (July 12, 2000), cases involving legitimate source income can be processed in at least two different ways which has resulted in a number of consequential changes in proceedings and much of our "historical" understanding of procedures may not continue to be valid.
First, cases continue to be "worked" within the Agency (CID) after referral from civil agents and/or "tips" or Form 8300 or suspicious activity report follow up. The Special Agent may have the assistance of a revenue agent in the investigation that typically will take a year or so to complete and generally involve three years if possible. The SAR is still prepared and internally reviewed, but now, following approval at the local office, it stays within the Regional Office of CID (where a conference is available) and, from there with approval and input (but not decision authority) from an attorney of the Internal Revenue Service (a so-called CT Counsel), the case can be sent to the Tax Division of the Justice Department for approval of the prosecution (and the crimes chargeable). While not a matter of right, normally a conference at the Tax Division can be obtained if requested quickly enough during the investigation. These investigations continue to use Administrative Summons to obtain evidence and disclosure of (and, theoretically, a right of the taxpayer to stop) information sought from banks, brokerage firms and other third party record holders to the taxpayer under investigation continues to apply. Typically, the Service will not engage in investigative techniques suchas wire taps (prohibited by Statute, 18 U.S.C. §§ 2510 & 2516(1)) and the like, nor the seizure of computers and documents (there can be exceptions to the later if there is reason to believe records will disappear).
A second approach that is now available and is being used with more frequency is a Grand Jury investigation directed by an Assistant United States Attorney (after obtaining Tax Division approval), still using Special Agents (here as specifically designated agents of the grand jury) of the Internal Revenue Service. In that situation, much of the investigation will be conducted in secret, information obtained with grand jury subpoenas and, procedurally the case will progress along the lines of a typical federal criminal investigation (and thus can include wire taps and the like where appropriate). However, the ultimate decision of whether to seek an indictment (and the charges requested from the grand jury) still remains with the Tax Division when Title 26 crimes are substantially involved (Tax Division Directive No. 71) and, again, while not a matter of right, if requested early enough, a conference with the Tax Division normally will be available.
Under either approach, in general (but not always), the civil processing of the case is suspended (assuming that the I.R.S. will later be able to establish civil fraud, there is no statute of limitations issue, although they will request extensions that normally should not be granted if an ongoing criminal investigation is present) until the conclusion of the criminal investigation. If the criminal investigation is concluded without a recommendation of prosecution where just the I.R.S. has been conducting the investigation, a letter will typically be sent to counsel from CI notifying them of that fact. If a grand jury investigation, normally the re-emergence of the civil agent is the indication of a decision not to presently proceed as a criminal case.
IV. WHAT WILL THEY DO?
As noted above, the investigation may be undertaken within CI or it may constitute a grand jury investigation and the type of investigation will somewhat impact what is undertaken. It also of course depends on the nature of the case. Among the many possibilities; cases can involve illegal source income that is being concealed or disguised, it can involve personal expenses or distributions that are being disguised as business expenses (or "phony" deductions that are not paid at all), it can involve payroll taxes that are not being paid to the government, it can involve "new" businesses formed to avoid paying old tax bills, it can involve estate tax situations where funds or assets have not been reported and it can involve income that is not reported.
Regardless, of the case, it typically will be document intensive. In general the methods of proof that will be developed will include one or more of the following: (i) specific item analysis (identifying specific items that were left off the return or put on the return that were wrong), (ii) bank deposit analysis (to identify more deposits than income reported typically); (iii) bank deposit/cash expenditure (to net out what should have been reported as taxable income for the year), (iv) cash expenditure analysis (also called a source and application of funds approach designed to show that much could not be spent in a year with that reported taxable income, it is similar to a net worth analysis); and (v) net worth analysis (where the Special Agent attempts to establish a beginning balance sheet of the taxpayer and then using deposits and expenditures from source documents determines a yearly taxable income figure to compare to the return actually filed.
While, again, the type of case and its origination drives to some extent the case processing, a number of fairly standard techniques are typically employed. First, is the surprise visit (often early in the morning) at the taxpayer's house for a "visit". If an existing power of attorney (Form 2848) is on file, this should only occur at the attorney (or accountant's) office (usually set up by the civil agent who forgets to mention his/her friend will be coming along). Reg. § 601.506, IRM CI Handbook (9.5), 1.4.4. This is not a courtesy visit and on almost no occasion would talking with the agents be a good idea (this not withstanding, unrepresented "targets" generally spend a few hours with the agents to straighten them out, and you spend the rest of the case trying to straighten that out).
Summons (or subpoena's if a grand jury investigation) will undoubtedly be sent to banks, brokerage firms and the like in an effort to obtain bank records and records of financial transactions (clients uniformly seem disappointed to learn of micro fiche and scanned copies of checks deposited with a bank, of cash withdrawals or withholding from deposits (how can they prove I didn't spend that cash?) and who has been paying money to the taxpayer if forgotten before). A taxpayer needs to physically respond to a summons but retains 5th Amendment rights not to testify. Corporations or other entities have no Fifth Amendment rights and normally their agents appearing for them have no rights on behalf of the entity. Generally, production of documents can be compelled even where incriminating, although who produces them may provide some important issues. U.S. v. Powell, 379 U.S. 48 (1964); Wilson v. U.S., 221 U.S. 361, 379-380, but see U.S. v. Hubbell, 530 U.S. 27 (2000); 26 U.S.C. §§ 7602(a), 7602(b) and 7609. Improper disclosures of a criminal investigation are potentially actionable but I have not had much luck getting the Court's to enforce the law (as I read it at least). 26 U.S.C. §§ 6103 & 7431; Schachter v. U.S., 77 AFTR2nd 96-858 (9th Cir. 1996) and Diamond v. U.S., 944 F2d. 431 (8th Cir. 1991). That said, ever so often they go too far. Snider, et. al. v. U.S., 468 F3d 500 (8th Cir. 2006).
The Agents will undoubtedly "discuss" the case with a number of individuals including the taxpayer's return preparer (such a discussion with the taxpayer's accountant return preparer, even with a summons, without the written consent of the taxpayer or a court order does not comply with the law but that does not seem to result in any benefit to the taxpayer. 421A.2 Code of Iowa). Normally notice of these interviews with third parties (other than the return preparer) will not be noticed to the taxpayer or his/her attorney.
Other, less common approaches, can include circular form letters (contacting all of the patients of a doctor to see what they paid him/her), surveillance, consensual monitoring, informants, undercover operations and mail covers (having the post office copy the outside of letters to or from a business) that are used in specialized cases, although not often in normal non-illegal source cases. Some of these can be damaging to an individual's reputation or business but, normally, that does not give rise to any legal rights.
Cases involving grand jury investigations will use grand jury subpoenas, search warrants, wire-taps and/or handwriting exemplars (although computers make this less important today) as well as many of the above procedures. A Special Agent (through appropriate channels) can request the use of the grand jury to strengthen a case or where it is determined that the administrative process cannot "develop the relevant facts" of a case within a reasonable period of time. IRM CI Handbook (9.5) 2.2 (July 29, 2002). Any such request must be approved by Supervisory Special Agent, the Director, Field Operations, and CI Division Counsel. IRM CI Handbook (9.5), 2.3.1.4 (July 29, 20020.
Cases processed through the grand jury are considerably harder to monitor then agency investigations. Even though Rule 6(e)(2)(A) of the Federal Rules of Criminal Procedure provide that no obligation of secrecy may be imposed onany person (other then provided in Rule 6(e)(2)(B)), AUSA's routinely "warn" that disclosures of grand jury information "could" constitute obstruction of justice issues. Absent a court order or direct application of a statute, such demands may be lawfully ignored. In re Grand Jury Proceedings, 814 F2d 61 (1st Cir. 1987); In re Grand Jury Subpoena Duces Tecum Dated Jan. 15, 1986, 797 F2d 676 (8th Cir.), cert. dismissed sub nom. Merchants Nat'l Bank of Fort Smith v. U.S., 479 U.S. 1013 (1986); In re Grand Jury Subpoena No. GJ31, 628 F. Supp. 580 (WD Ark. 1986). False statements or false documents presented to the grand jury can lead to perjury (18 U.S.C. § 1621) and false declaration (18 U.S.C. § 1623) charges. Helping others "mislead" the grand jury can lead to subordination of perjury charges (18 U.S.C. § 1622).
V. DEFENSE STRATEGIES
(there are some, sometimes)
Initially, at the start of a criminal investigation of a case, the attorney's role is, primarily, to: (i) control his/her client (prevent his/her client from talking with the agents or third parties that they will be talking to, avoid the client providing false documentation to the agents and others); (ii) monitor the case (while all clients tell the truth to their attorneys at all times, sometimes there are surprises) which includes getting copies of documents that you know the IRS is getting that appear relevant, file a FOIA request if your client spent a minute or two talking with them before you were hired and hire a "Kovel" accountant (U.S. v. Kovel, 296 F2d 918 (2d Cir. 1961) to analyze the taxpayer's records and returns (know more than the IRS does); (iii) to the extent available and only after you have all the facts you can get, see if a "theme" of the case should (or ethically can) be presented to the agents; and (iv) meet from time to time with the agents (they are "fishing" and you are "fishing", who is better?).
Ultimately, most cases are defended along one or more of the following paths: (i) the agents are wrong; that can include things like: (a) I had all kinds of cash from way back and that is what I am spending now; (b) the agent's analysis is way wrong (in a net worth, they do not have the required opening balance sheet or they do not know how depreciation impacts that analysis-it happens); (ii), O.K., they are right the return is wrong but it happened by mistake (over and over again), this can be "mechanical" (ie, a computer program that caused it and that can be demonstrated) to an analysis of how the return was prepared (expenses reported from cancelled checks, income from farm receipts at the elevator-a few of which may have blown out the truck window); (iii) my return preparer did it (I gave him/her all they needed to do an accurate return and they just relied on my summary notes rather than the detail I gave them); (iv) that is not income (it was a "gift" or a loan that I was going to repay someday or the corporation had no E & P and thus that money I took out of there is not taxable income-better for a 7201 crime then a 7206 crime).
Clearly there can be far more defenses then the above but it provides some idea of how to process the defense early on. If the claim is a mistake, should amended returns be filed (as soon as I found out how this had been screwed-up I immediately corrected it with filed returns)? It seems simple but it creates a number of issues. First, if the case is going forward, the amended return will be used as evidence of what the correct return should have looked like (and thus the opportunity to cross-examine agents at trials over errors they made has been lost). It also may require you to correct "errors" that the Service has not discovered and, worse of all, if they are filed and not correct, they can serve as a basis for a separate prosecution (U.S. v. Barrow, 1997 U.S. App. Lexis 16239 (6th Cir. July 2, 1997)). Since the cases go on for several years with interest running on the penalties and unpaid taxes, a better alternative may to pay into the Internal Revenue Service cash in lieu of a bond under Rev. Proc. 2005-18. See the attached example that is used when it is not expected that the bond amount will exceed the ultimate tax, interest and penalty liability (or where the nature of the underlying adjustment cannot be disclosed).
Regardless of the defense contemplated, providing it to the agents during the investigation is clearly a very difficult decision to make. You cannot affirmatively provide them with misleading (read "inaccurate") stories (bad words like "conspiracy to conceal a tax crime", "obstruction of justice" and the like come to mind). Secondly, the agents will run the story down if they can in an effort to prove the defense is wrong (they have a lot of time invested in this case and they will only go away if convinced they can make no case at all). In general, the decision to share much with the agents during the investigation should be resolved by, when in doubt do not. Do not provide information that will not likely resolve the case at the agent level in your client's favor unless there is no likelihood your client would take the case to trial and thus this is the only meaningful chance to resolve without charges.
VI. REALLY HARD PROBLEMS (AND A NOT SO HARD PROBLEM)
A. "Correcting A Problem."
Initially (and as part of what often is the not so hard problem), attorneys are occasionally consulted when a taxpayer determines that his/her earlier returns might be in error but he/she is not presently under audit and wants to know what to do. While occasionally this comes about because of a sudden "death bed conversion", generally something has occurred that causes them concern that the IRS may discover them (even including letters from the IRS in non filing cases).
In general there is no immunity from prosecution in filing late returns or correcting earlier false returns. In effect there are potentially two agencies (Internal Revenue Service, IRM CI (9.5), 9.5.3.3.1.2.1 (Dec. 11, 2002) and the Department of Justice, DOJ-CTM § 4.01(2)) that have input in that issue. There have been a variety of formal and informal voluntary disclosure policies over the years but, in general, the present state of affairs is that there is no "protection" from prosecution for making a voluntary disclosure. U.S. v. Hebel, 668 F2d 995 (8th Cir.), cert. denied, 456 U.S. 946 (1982); U.S. v. Choate, 619 F2d 21 (9th Cir. 1980). That said, legitimate source income cases (either failure to file or a bit more risky, fraudulent returns) normally are resolved with the Internal Revenue Service by the filing of corrected returns with the Service Center (with as bland an explanation as can be justified). In illegal source cases or where the taxpayer has already been contacted, the argument for voluntary disclosure is normally (but not always) ineffective.
B. "Ongoing Egg Shells or CI Investigations."
Among the most difficult problems to deal with relates to ongoing tax return compliance. Where, as often is the case, the problems in the earlier returns flow over into returns that must now be filed (capital loss carryovers, depreciation, and the like) or would dramatically disclose what had occurred before ("cash" contributions go from $50,000 every year to $100.00). Clearly what gets filed now must be correct (you don't really want to know about the "crime-fraud" exception to Attorney/Client privilege).
The alternatives facing the client in this situation are all relatively "bad" but as October 15th approaches, must be dealt with. A tax return that is filed with little information other than the names and social security numbers and the words5th Amendment all over it is not a tax return and thus little has been achieved (and, of course, if the audit still appears to be "civil" or a so-called "egg shell audit", filing such a return may quickly redirect the agent). U.S. v. Jordan, 508 F2d 750, 752 (7th Cir.), cert. denied, 423 U.S. 842 (1975); U.S. v. Daly, 481 F.2d 28 (8th Cir.), cert. denied 414 U.S. 1064 (1973). Courts have fairly uniformly held that specific 5th Amendment claims as to the nature (description) of income can be made on a return that accurately discloses taxable income but, in many cases, that approach does not solve the problem as a process of elimination will discloses the very thing you are trying to avoid describing (and, again, may turn an apparent civil case into a criminal case). U.S. v. Verkuilen, 690 F.2d 648, 654 (7th Cir. 1982); U.S. v. Neff, 615 F2d 1235 (9th Cir.), cert. denied, 447 U.S. 925 (1980). In an "egg shell" audit situation, if possible, a very carefully worded disclosure on the subsequent returns that hopefully is both accurate and not attention drawing may be the only solution.
Another alternative that is considered is reporting a matter consistent with the prior year's return with the a specific disclosure such as "The taxpayer's loans from his company are under criminal investigation and this return reflects income consistent with the prior returns. If a final determination is made that those accounting entries are incorrect, the taxpayer will pay the additional tax and interest due." Still looks a bit like a false return but maybe not a fraudulent return.
Another strategy, probably the riskiest, is to "file" a letter from the attorney that discloses the taxpayer's name and social security number and enclosing a check for a round amount that exceeds the likely liability and states that the taxpayer is under criminal investigation and cannot at this time file a return, but will as soon as that phase of the case is resolved. While the Justice Department seems to tolerate this approach (for now) while repeatedly stating there is no authority under the law to advise someone not to follow the law, the Director of Practice of the I.R.S. has publicly stated that he feels it is a basis to revoke that attorney's "right" to practice before the I.R.S. (although it does not appear to have occurred) and the Fifth Amendment privilege against self-incrimination is not a valid basis for to avoid filing a legally required form. It is certainly not clear that the taxpayer's claim to be following his/her attorney's advise in this regard would protect them from at least failure to file prosecutions (although again, they do not appear to have occurred). And, of course, this isn't a solution for the "egg shell" audit and is repeat with danger for everyone involved. Remember, I said these are the hard problems (and it is a difficult area of the practice).
Complicating all of the above is protecting the attorney/client privilege relative to returns that are to be filed. Case law suggests, in the 8th Circuit at least, that return preparation is mere "scriveners" work and not subject to the privilege. Alternatively, and perhaps more defendable, the material on the return is intended to be disclosed and thus the underlying documents and decisions are not attorney/client communications relative to legal work but, rather were intended to be disclosed and thus are discoverable. Canaday v. U.S., 345 F.2d 849, 857 (8th Cir., 1966); U.S. v. Frederick, 182 F3d 496, 500 (7th Cir. 1999), cert. denied, 528 U.S. 1154 (2000); U.S. v. El Paso Co., 682 F2d 530, 539 (5th Cir. 1982), cert. denied, 466 U.S. 944 (1984). Thus as the case moves forward, the problems of who prepares the future returns and what information they are given increases, substantially, the problems of the attorney (and his/her client).
C. "Bad Documents".
A client may have created false documents during the year to "support" the deductions he/she would be taking on the return for the year, given them to the return preparer (or the summaries from such documents) which were, in turn, used on the false return (and which now have been summoned). Alternatively, as the audit progresses the client may have "self-helped" and created documents that appear to support deductions or the like and, under either alternative, such documents have now been summoned for production. As previously noted, providing false documents to the I.R.S. is a crime in of itself and disclosing these as false documents to the IRS would be detrimental to his/her case. As to "newly" created false documents that never were used in the original preparation of the return nor been part of the books and records of the taxpayer, their production or disclosure shouldn't be a major issue (they should not be produced). The answer to the production of documents that were part of the taxpayers' books and records and were used in the preparation of the return (directly or as support for the summaries) is a far harder issue for all concerned. I am not sure what the perfect answer is but presumably delivering such documents with a note stating "these are the documents that comply with summons that existed at the time the return was prepared" is the initial answer and avoiding at all times any representations whatsoever to the agent that the documents are genuine or legally support deductions taken would be critical.
D. "Two or more Taxpayers".
Husband and wife, business partners, they all have common interests and see no reason to be paying a "bunch of lawyers" to handle the case. In addition, in many cases, they cannot afford to hire that bunch of lawyers. Unfortunately, as time goes on (and in these cases it does), people become a little less friendly, and then a lot less friendly and then they might even decide it was each other's fault and they didn't know anything about it (this often happens after they understand what can happen to them). Always advise of conflict of interest issues, always do it in writing, get signed consents (including the right to continue to represent one party) and, if possible, always try to force separate counsel even if initially the other attorney is to play a "quiet" role.
VII. WHAT WILL HAPPEN IF THEY FIND OUT?
(Jail)
The goal of a criminal prosecution is to put your client in jail. At the same time, the "voluntary" (don't you believe it) guidelines place a huge disincentive in exercising your client's right to go to trial to force the government to prove their case and pretty much dictate "jail time" for those convicted or pleading guilty of tax crimes. In determining the sentence the primary consideration will be the amount of tax attributable to the crime (the fraud items) for all years that the Government can establish a similar pattern or course of conduct (regardless of any statute of limitations or conviction, assuming a conviction or plea to at least one year). In addition if the fraud started at the corporate level and then to the shareholder/employee, the guidelines will include both taxes. There is no parole under the federal system and thus the defendant pretty much serves the full sentence in prison. As some idea of the sentences that will be given a defendant, the present "guidelines" provide as follows:
| Months in Prison | ||
| Fraud Tax Dollars | Trial | Plea |
| Over $30,000 | 15-21 | 10-16* |
| Over $80,000 | 21-27 | 12-18 |
| Over $80,000 | 27-33 | 18-24 |
Where the minimum sentence is under a year* the Court can permit a portion of the sentence to be served at home (but 1/2 the minimum still must be in some form of jail). However, even the above understates the likely jail time as there are a number of increases in the penalties for sophisticated means and the like. If a defendant goes to trial, testifies and is convicted, the judge will likely conclude at sentencing that he "lied" (obstructed justice) and thus the likely range of sentence for over $30,000 that goes to trial would really be 21-27 months, 27-33 months for over $80,000 and 33-41 months for over $200,000 (but under $400,000). In addition, there can be criminal fines assessed and costs of prosecution.
Finally, the taxpayer gets to pay the government for his room and board while in jail, and the IRS and Iowa each get to collect all the taxes, penalties and interest they can justify (which is usually a good deal).
VIA CERTIFIED MAIL
RETURN RECEIPT REQUESTED
Director
Internal Revenue Service Center
Kansas City, MO 64999
Re: Taxpayer A
SSN: ___________
Return: 1040
Tax Years: 2006 or before
Deposit in the nature of a cash bond (Rev. Proc. 2005-18)
Dear Director:
Please find enclosed with this letter a check made payable to the Internal Revenue Service in the amount of $___________. The enclosed check is to serve as a deposit in the nature of a cash bond as provided by Revenue Procedure 2005-18, the terms and conditions of which are herein fully incorporated within this letter by this reference. Such payment is made under protest and the taxpayer hereby asserts his retained rights under 26 U.S.C. § 6402(a), 6511(a), 6511(b), and the Regulations and Rulings thereunder. No amount is herein specifically designated as a disputed amount. THIS IS A BOND DEPOSIT AND IT IS NOT TO BE APPLIED AGAINST TAXES OR INTEREST WITHOUT FURTHER DIRECTION.
Thank you for your courtesy and attention to this matter.
Yours very truly,
William Sidney Smith
For the Firm
WSS:***
Enc.