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Tax Crimes
I. Introduction.
As the Governments (both the Federal and State Governments) struggle to balance their budgets, the various agents with responsibilities for enforcing the tax laws become more aggressive and thus it is not surprising that 2010 has seen an upswing in enforcement efforts.
Dealing with the Federal situation, the variety of charges available to the Government is considerable. Tax Fraud (the intentional filing of a false tax return that reflects a material understatement of tax liability) is what most people think of when they think of tax crimes but the Government can also charge filing false statements (they do not have to prove that it cost the Government any tax money) as well as false statements to an Agent (you do not have to be under oath, it is enough that you understood that it was an agent undertaking an investigation when the false statement is made to him/her) as well as the failure to file various tax forms and returns (yes, it is a crime not to file a federal return if you have enough income even though you have no tax liability).
As a result, prosecutions for not only income tax evasion and failure to file tax returns have increased but with the difficult economy, so too have prosecutions for the willful failure to pay payroll taxes or fuel taxes.
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II. What is it all about?
It is not the money they are after in a criminal tax investigation. It is the taxpayer they are after under the theory that convicting that person and putting them in prison will have a "ripple" effect with people that knew the defendant and/or read about it in the paper. Accordingly, offering to pay the money will not make them "go away" but rather will be viewed as further evidence of the willful nature of the earlier return. The consequence of a conviction of a Federal tax crime is generally prison (assuming a reasonable amount of money is involved). The judges use a non-binding guideline system to determine sentences (some judges adhere to such guidelines, others not as much) and, for example, an understatement of tax (due to fraud) of $120,000 could result in a prison term of 18-24 months if convicted. In the Federal system there is no parole so a person serves substantially all of the sentence in jail and of course still must pay the taxes, civil fraud penalties (75% of the understatement of tax due to fraud) and interest on both the taxes and the fraud penalties.
III. How does the Government find out?
Unhappy spouses, business partners or acquaintances can ‘tip' the I.R.S. off about the case (out of spite or to try to obtain the reward), but currency transactions (leading to suspicious transaction reports by the bank) or large omissions of income reported on 1099's or W-2's can also lead to the investigation. However, the majority of cases are uncovered by a civil audit of a client (probably initiated by the scoring system used to select returns to start with) and pose the most difficult of decisions for the taxpayer and the advisor. You cannot make false statements to the agent (a separate crime) yet at the same time you need to appear cooperative in an effort to avoid "tipping" the agent off as to the difficulty with the return. At the same time you may have to deal with future returns (that must be filed correctly) and the fact that examinations (and investigations) take a great deal of time and interest is running on all of the liabilities.
IV. How can you tell if the case has "turned" criminal?
Initially, Special Agents (the criminal agents the I.R.S. uses) generally work together (so that they can support one another's story as to what the taxpayer said in response to certain questions). They often show up very early in the morning at the taxpayer's house in an effort to surprise him/her (and normally are successful in the effort, obtaining an incriminating interview that would otherwise be unavailable). If the case has been a civil audit and then several months go by without further activity (particularly after discovery of questionable items) there is a substantial danger the case has been referred to the Special Agents (members of the Criminal Investigation Division or "CID") and they are involved in background review of the facts before trying to confront the taxpayer.
V. How to Respond.
During the civil part of the case, extend current returns as long as possible; be very cautious on all responses (false statements can make an otherwise winnable case an absolute looser plus add additional charges to an indictment). Better to say one needs to look at records or the like before responding than to give a false answer. Case law supports prosecutions for false statements even for falsely responding to questions like: (a) Is there any thing wrong with your return that you know about?; (b) Do you ever pay anyone in cash?; (c) Do you deposit all of your money into the bank?
While the tax case remains "civil" the responses should be very guarded. There is no client accountant privilege so the taxpayer should not disclose "wrong doing" to the accountant (who will likely be a witness in the case anyway) and assuming an attorney is hired, a power of attorney filed (Form 2848) and then "isolate" the taxpayer from the agent/agents as the case progresses. If at any time Special Agents appear in the case (there will be two and they will identify themselves), do not provide an interview, there are no exceptions to this rule.
A critical factor to keep in mind is that tax crimes are so called crimes of specific intent requiring the Government to prove that the taxpayer actually "knew" that the return was false when it was filed (or "knew" that he/she had to file a return in that situation). Thus preventing causal comments by the taxpayer to seemingly easy questions (surely you know you have to file a return or know that item belongs on the return) can make the case very difficult.
VI. The Nature of the Investigation.
Ultimately, all cases that are primarily tax cases must be reviewed and approved for prosecution by the Justice Department in Washington, D.C. Normally the criminal portion of the case is "worked" by the local Special Agents and then a report (SAR) put together and sent to a regional office for approval. Assuming such approval, it then goes to the Justice Department and if they approve the prosecution, back to the local U.S. Attorney's office. Alternatively, under certain conditions, an investigation can be initiated by the local U.S. Attorney's office (with proper approval from the Justice Department) and grand jury subpoena's used by the Special Agents (rather than administrative summons). A case that starts within the local IRS CID office will likely take nearly three years to get to the stage where an indictment is sought. A case worked out of a grand jury will take less time although again the nature of the case often dictates a great deal of the timing.
A representative of a taxpayer has a number of opportunities to meet with agents and Government attorneys that are responsible for the case in an effort to attempt to end the investigation or at least impact its overall direction but, as in all Governmental investigations, the case can take on a life of its own and even where evidence is not overwhelming, if too much time has been put into the case, become a very difficult one to end.
VII. Options before the Agent appears.
At present there really is no "voluntary disclosure" policy that can provide absolute protection for a taxpayer that wants to correct a return (or returns). In spite of that, normally an amended return that corrects an earlier one and does not reflect clearly otherwise criminal conduct will not normally result in a criminal investigation. However, great care must be exercised in that situation to make sure that the amended returns are correct in every material way and at least strong consideration given to correcting other year's similar "problems" at the same time.
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