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Civil Audits vs. Criminal Investigations

Table of Contents

    Date: 03/04/12

    Topic: Criminal Tax Representation

    The IRS divides its responsibility of enforcing the tax laws into two divisions: the Civil Examination Division (CED) and the Criminal Investigation Division (CID). This post explores the differences between these.

    The CED is the civil division, and its chief responsibility is to conduct civil audits, which are performed by revenue agents. The goal of their inquiry is to decide whether taxpayers have reported the correct tax liability. Revenue agents are mostly number crunchers, and they do most of their work in their office, but sometimes a civil audit will require field exams to the taxpayer’s office or home.

    Revenue agents commence a field exam by contacting the taxpayer, giving her notice that she is under internal investigation. The agent has broad authority to compel document production and if the taxpayer refuses to furnish the requested documents, she may be served a summons ordering her to do so. A revenue agent does not carry a firearm, nor do they provide the taxpayer with a Miranda-like warning (i.e. telling them they have a right to silence, an attorney, etc.).

    If the agent, during the civil audit process, discovers a “firm indication of fraud,” he may refer the case to the IRS’s criminal division for investigation. Generally, if the agent believes the taxpayer knowingly violated the law, he is required to cease the civil audit and refer the case to the CID.

    The CID’s chief responsibility is the investigation of criminal violations under the Internal Revenue Code (“IRC”). Criminal investigations are generally thought to serve two related purposes: (1) to inspire the public’s confidence in the government’s enforcement of criminal tax laws, and (2) encourage a taxpayer’s voluntary compliance (voluntary disclosures).

    A criminal tax case differs from a criminal non-tax case (e.g. a homicide case, or a robbery). In the criminal non-tax case, the crime is known (e.g. there was a murder or items were stolen) but the perpetrator is not. Much of the efforts of the government in these cases is spent on identifying the perpetrator of the crime.

    In a criminal tax case, however, it is the reverse: the taxpayer (i.e. the perpetrator) is known, thus the IRS’s entire time is spent collecting evidence against you. How do they get the evidence against you? Typically it is from those conducing financial business with the taxpayer: her accountant, bankers, etc. It is a scary prospect that one’s accountant can be compelled by the IRS to disclosure information you thought was protected by the so-called “accountant-client privilege.” However, the truth is that the “accountant-client privilege” does not protect you in a criminal case. By contrast, conversations with one’s attorney are protected, and insulated by the attorney-client privilege.

    The CID uses “special agents” to operate its affairs. Special agents are involved in detecting criminal violations and deciding whether to recommend a criminal prosecution. Their job is to amass a case against you for failing to file, filing of a false return, for engaging in tax evasion, or money-laundering.

    Typically, a special agent will not provide a warning or notice before showing up to your residence. His goal is to catch you by surprise, so that when he interviews you he can collect much evidence from you.

    Unlike revenue agents, special agents carry a gun and a badge, and are required by the internal revenue manual (IRM) to issue Miranda warnings. However the Supreme Court has said they are not required by the Constitution to issue a Miranda warning. Beckwith v. United States, 425 U.S. 341, 345-46 (1976) (Miranda warnings are not required when interviewing taxpayer under investigation if questioning does not deprive person of his freedom of action in any significant way). Often a taxpayer will speak freely with a special agent, not knowing that he is offering potentially incriminating evidence against him for a subsequent trial.

    A revenue agent’s referral of a civil audit is the most common way a tax case turns from civil to criminal. During a routine audit, a revenue agent examines the taxpayer’s books and records, and often unearths evidence of fraudulent reporting. When the agent discovers evidence of fraud during the civil audit, he may be required to cease his investigation.

    “If, during an examination, an examiner [i.e., revenue agent] uncovers a potentially fraudulent situation caused by the taxpayer and or the preparer, the examiner shall discuss the case at the earliest possible convenience with his/her group manager…. Once there is a firm indication of criminal fraud all examination activity shall be suspended.”

    United States v. McKee, 192 F.3d 535, 541-42 (6th Cir. 1999)(quoting old Internal Revenue Manual § 4565.21(1) (August 1, 1996)).

    Moreover, the revenue officer is not permitted to tell the taxpayer that the case has been transferred to the Criminal Investigation Division:

    “The revenue officer should inform the taxpayer that they are conducting a civil investigation, and that the information obtained can be shared with CI. Under no circumstances should the revenue officer inform the taxpayer that the case has been referred to CI. This is CI’s responsibility. The revenue officer should immediately notify the special agent of the contact with the taxpayer.”

    IRM 5.1.5 (emphasis added).

    However, the agent is encouraged not to cease the civil investigation “too soon” because he is to wait until there is a “firm indication of fraud”–which is a seemingly vague line. For this reason, if you are under a civil investigation by the IRS, you should retain legal counsel.

    Even the IRS admits in a Memo that the line is a vague one, for “revenue agents … must walk a fine line between vigorous investigation and overzealous, and even unconstitutional, investigations.”


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