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When tax defense counsel parallels tax crime investigation

What Advantages can be Derived Where a Criminal Tax Defense Counsel Team Parallels a Tax Crime Investigation?

In distinct contrast to other general criminal law attorneys, criminal tax defense counsel that is representing a client facing an investigation by a taxing authority has a very real opportunity of playing a crucial role in attempting to fend off, at best and mitigate at worst, an indictment, subsequent arrest and prosecution of their client for the tax crimes their client may or may not have committed.  In order to accomplish this, criminal tax defense counsel must correctly interpret every development in the investigation, which is at time more art than science and investigators ordinarily play their cards very close to the vest. If the client is, ultimately indicted counsel will have to advocate a client’s case in front of the Criminal Investigation Division (CI) and the Tax Division without the benefit of significant amounts of discovery, especially where compared to civil litigation. Often the crux of preliminary representation steps necessary to effectively advocate in front of the CI and Tax Division and ultimately at trial, is the decision to parallel the taxing authorities’ criminal investigation agent’s work during the investigation.

Paralleling the Investigation

Paralleling a tax crime investigation is an art form that is ultimately driven by the methodologies followed by the investigating agent; however, defense counsel has an advantage where they have access to the client’s superior understanding of the facts behind their tax compliance history and their full cooperation. Counsel’s efforts to parallel the investigation may begin at the same time as a civil audit begins, where an eggshell audit is suspected, following a referral stemming from a civil audit, but often start after the client first becomes aware that he or she is under criminal investigation.   Clients often first become aware they are being investigated when they are approached out of the blue by a CI agent wearing a gun and a badge and read their noncustodial rights and are handed originals of their past tax filings and are barraged with questions designed to illicit lies or evidence on the willful intent of the taxpayer to purposely understate their tax liability.  Occasionally client learn that they are under investigation when an employee, business associate or other third party has been approached and interviewed. Counsel’s immediate concerns at this stage surround determining the nature of the tax investigation and the steps already taken by the criminal investigator.  Counsel will then endeavor to get “out in front” of the continuing investigation.

Counsel should attempt to identify who has been (or is likely to soon be) interviewed and what information came out of the interview, if any summonses or subpoenas have been (or are likely to be) issued and the actual responses the service is likely or has already obtained.   Counsel should determine if the IRS is using an employee informant and counsel the client not to retaliate if one is suspected as employee informants are protected by Whistleblower laws.   Counsel will want to quickly identify witnesses both for (exculpatory) and against the client. After counsel has retraced the special agent’s work to the extent possible, conducted interviews and debriefed all potential witnesses, examined all documentary evidence available from the client’s records and evidence held by third parties, counsel will have caught up with the investigation and his or her attention will gravitate toward paralleling the continuing investigation actions taken by the criminal tax investigator.

Counsel’s primary objective after thoroughly speaking with his or her client, examining all relevant income and information compliance  documents previously filed or that are assumed to be available to CI, is to make a reasonable determination of the potential tax violations being investigated.  (e.g., Corporate, Partnership or Personal income tax returns, Fin Cen 114’s, 3520’s, etc.). Counsel should expeditiously interview the preparer and secure copies of any correspondence, source documents or workpapers that may become relevant as to the client or the preparer’s culpability for any misstatements later identified.

A public records program like accrurint  http://www.accurint.com/ should be queried to determine all available public information that is available concerning your client (e.g., court files, deeds, mortgages, aliases, past litigation, media mentions, and criminal history) should be obtained and studied. This information can quickly give counsel an idea if the client’s past amounts of reported taxable income can or cannot support their currently identifieable net worth amoung other things.

Interviewing/Debriefing Witnesses

If possible, witnesses should be interviewed prior to their being contacted by the government’s investigators.  If not they should be debriefed as soon as possible after they are interviewed or testified before a Grand Jury. Counsel is tasked with learning what a witness has (or will) say under oath, regardless of the client’s wishes or expectations.

Witness interviews and debriefings are most advantageously performed by trained investigative professionals hired by counsel, with counsel in attendance and participating. The client should not attend as any communication may not be privileged in the presence of a third party witness and the client may be a distraction or negative influence during this process. Either copious notes should be taken or where appropriate the interview recorded, filmed or documented via court reporter. It may be advantageous to have the witness execute a formal affidavit to memorialize and authenticate the witnesses testimony. Counsel should anticipate that the government’s investigative work-product may not be made available to him or her prior to its production at a criminal trial, A copy witness’s statements to CI is often provided which may or may not become available to counsel depending upon the witnesses’ cooperation with defense counsel.  It is imperative when interviewing or debriefing witnesses to not give away incriminating evidence or draw ought issues that may subsequently become of issue to the criminal investigators.

There is nothing wrong with approaching witnesses after they are interviewed or testify provided they willingly choose to grant a defense exit interview or debriefing. Interviewing witnesses before they have testified or have been interviewed by the government is occasionally professionally debated but there is nothing blatantly illegal or unethical in this technique. However, it is not without risk to both the client and defense counsel. Counsel is wise to assume that government investigators will inquire about any contacts with the target or his or her defense team. CI will be looking to determine what questions were asked to look for defense weaknesses and areas of concern and to learn if any criminal admissions were made or were implicated.  It is imperative that no witness or evidence impropriety occur during this process (e.g., bribery, coercion, witness or evidence tampering, obstruction, or subornation of perjury).

If case paralleling is consistently carried out with due care and proper ethics, the process should become routine and raise no concern for well-trained and experienced defense counsel. To mitigate the potential for legal and ethical problems surrounding defense counsel’s interactions with witnesses, a standardized form letter can be distributed to witnesses prior to their being physically approached by the defense team. The form letter ordinarily includes a short explanation of the procedural process surrounding the defense inquiry, and an advisory as to the witnesses’ right to representation and their right to refuse an interview, and their absolute right to (in the absence of a court order) disclose to the defense team the testimony or documentary evidence provided to the government.

Use of Experts

Counsel, or his or her staff, may not be proficient in every area of expertise necessary to analyze all of the evidence surrounding a criminal tax investigation. Well-funded criminal defense teams will include the skills sets and professional opinions of forensic, valuation, ex government investigators, and various other experts to facilitate effective case-paralleling, contribute in the CI and Tax Department conferences, and if necessary, at trial. It is not unusual for our office to seek the expertise of ex Tax Division prosecutors, outside criminal defense attorneys or CPA’s with specialized expertise in a client’s fact pattern or industry, and ex-government criminal investigators.

Written Kovel agreements with experts should be carefully drafted to ensure that the expert is unequivocally engaged by defense counsel and not by the client in order to guarantee, to the extent legally possible, that attorney-client privilege and work-product protection will attached to the communication with and work product produced by the expert. An expert’s agreement should make it clear that the expert has been engaged solely in anticipation of subsequent or current legal proceedings and or litigation. Such agreements should define the expert as defense counsel’s Bailee as to any records provided for analysis and dictate that the expert perform solely within counsel’s privileged relationship with his or her client.

Use of “Light of Day” Accountants as Trial Experts

In defending or trying to prevent a tax prosecution, counsel will ordinarily utilize accountants to analyze tax and information returns, financial statements and underlying ledgers,  assist in developing the cross-examination strategy for the government’s experts / witnesses at trial,  and testify as an expert at trial. Accountants that are best suited for this have forensic training and experience and in-depth knowledge of the criminal investigation procedures typically followed by government investigators. Light of Day Accountants are ordinarily shielded from direct communication with the investigation target to protect attorney client and work product privileges.

An accountant retained by counsel or on counsel’s staff that is not expected to testify is known as a Kovel accountant referencing back to the case that established the current precedent that generally extends attorney-client privilege and/or work-product protection to the client’s interactions with and work product produced by the Kovel Accountant where they are employed by the target’s lawyer rather than by the client under criminal investigation.

The Kovel accountant works under an exception to the general rule that there is ordinarily no evidentiary privilege for communications between an accountant and his or her client. If the Kovel privilege claim is attacked by the government the judge charged with adjudicating the challenge will ordinarily make an in-camera determination focusing on the arguments both in support and in opposition to the claimed privileges and the documentary or testimonial evidence at issue.

Under no circumstances should the client’s accountant and or return preparer of the tax or information returns at issue be utilized as a Kovel accountant because of the inevitable complications with testifying as a fact witness where they may have harmful knowledge or work product that cannot be prevented from discovery by the prosecution. It may very well be impossible for a court to distinguish between knowledge gained as an accountant or return preparer (pre Kovel) from that learned as the Kovel (post Kovel).  Where a court cannot determine between non-protected pre Kovel communications and protected Kovel communications, the protected communications may be discoverable by the government.  For this reason, the Kovel accountant is does not ordinarily prepare current, amended, or delinquent tax returns, since that can constitute a waiver of the attorney-client privilege.  Where significant risk surrounds these duties a Light of Day accountant that is shielded from any communication with the client should be utilized.

It is also important to note that a Kovel accountant’s communication with a client are only within the attorney-client privilege where the attorney’s advice is sought and the Kovel accountant’s work is dedicated to assist him or her with providing legal counsel. Care should be taken to avoid any circumstances that could appear to the government as if the client is actually seeking the advice of the Kovel Accountant directly.

Use of Private Investigators

A well-funded criminal defense team will often utilize a private investigator in the case-paralleling process. They are used to locate, interview and investigate witnesses, conduct public record searches, serve subpoenas and assist counsel in interacting with witnesses and government investigators and other personnel.  They are also used to determine the underlying facts of the case and what documentary and testimonial evidence is available to CI in general. It is imperative that Counsel utilize an investigator that is ethical, honest and has impeccable respect for the law.  The most relevant laws that are on point with the investigative function that can create exposure for the client, counsel and the investigator  surround eavesdropping via electronic means, subornation of perjury, obstruction, trespass (right to access private property), , and witness tampering.  Often the best private investigators for this purpose are ex- government special agents.

Polygraph Evidence

Willfulness (as opposed to ordinary negligence), is the most crucial element for the defense to refute where a tax, structuring, or money-laundering charge is sought against a client.  The client’s state of mind (knowledge and intent), does not ordinarily lend itself well to polygraph examination because of the client’s after-acquired facts and potential knowledge of guilt will negatively skew the polygraph results. There is also some uncertainty whether the results of such testing are admissible evidence before a trier of fact. However, polygraph testing can occasionally be used sparingly by defense counsel to support client assertions and narrow issues in conferences with CI, the Tax Division and with the Prosecution.

Polygraph examinations of a client can also be voluntarily utilized as part of a plea, immunity or forfeiture agreement, where the government requires evidence on the client’s truthfulness or continuing compliance with the agreement’s conditions. In such scenarios, counsel should hesitate to allow a single polygraph test to be wholly determinative and should negotiate the legal right to substitute the government’s examiner or to require a retest if the polygraph results are unfavorable or undesirable.

Impeaching the Informant

Ordinarily a special agent will not conduct a thorough investigation of an informant’s background and finances even where the government’s case heavily relies on the use of the informant. Counsel may find it advantageous to investigate the informant in order to secure impeachment evidence. Evidence on an informant’s lack of veracity, mental impairment, co tax crime culpability, criminal record, history of substance abuse, can be used to impeach the government’s witness.