BACKGROUND
Special agents of the Criminal Investigation Division (CID) understand all to well that the key to proving criminal tax cases is obtain evidence of the taxpayer’s criminal intent. The best sources of that evidence are admissions and false statements of obtained directly from the taxpayer. To this end, the Criminal Investigation Division systematically attempts to secure the cooperation from taxpayers (especially unrepresented taxpayers) under investigation and from third parties to develop maximum evidence of fraudulent intent. Criminal tax investigations normally cover many transactions over several years and since direct evidence of criminal intent is usually difficult to obtain, special agents are skilled at establishing intent through circumstantial evidence.
A special agent usually begins an investigation by gathering background information about the taxpayer. Other steps in the investigation may include interviewing the taxpayer his return preparer, examining the taxpayer’s books and records and returns from prior years, investigating the taxpayer’s education and employment history, and locating the taxpayer’s bank accounts. Investigating agents may resort to indirect methods of proof such as the net worth method to establish not only the largest possible tax deficiency but a clear intent to defraud. The government can also prove a tax deficiency by demonstrating that specified items were omitted from gross income.
Taxpayers can become the target of a criminal tax investigation by failing to file returns, by failing to pay taxes when due, by providing incorrect information to the IRS, or by being mentioned in an informant’s report. All the defense alternatives available to a taxpayer under investigation pose risks, including the risk of imprisonment, a substantial civil fraud penalty, and the loss in standing with business associates and neighbors when agents question them in connection with the criminal investigation. A broad investigation may produce evidence of the taxpayer’s poor reputation for truthfulness, which can be used by the government to rebut defense character witnesses.
CID’S INTERVIEWING OF THE TAXPAYER AND WITNESSES ASSOCIATED WITH THE TAXPAYER
When initially contacted by the special agent, it is a common mistake for the taxpayer to agree to answer questions without first making use of his or her fifth amendment privilege against self incrimination and his right to have an attorney present. Taxpayer are often shown copies of their previous returns and asked whether all his or her income has been reported on them in order to elicit a false exculpatory statement. By requiring narrative (as opposed to yes or no) answers the agent encourages the unsuspecting taxpayer with substantial opportunity to mislead or to confess in order to obtain circumstantial evidence of willfulness. Consequently, as soon as I am retained am retained, I will request that the my new client write up his or her recollection of the initial interview with CID. I also counsel that know Witnesses related to the client’s case should be requested to obtain copies of their statements made to the IRS for use in preparing the client’s defense.
TAKING RETURN PREPARER STATEMENTS
Unfortunately, your return preparer or accountant is usually placed in a position of great trust. The bad news here is that ordinarily the vast majority of what is communicated by you to your accountant or preparer is not privileged and they can and routinely is forced to be a Witness Against you. CID knows that the testimony of the person who prepared the returns in question often is crucial to his or her case. If the CID special agent establishes that the taxpayer misled the preparer or withheld material information from him, then he has shown substantial evidence of criminal intent. To make matters worse, it is in your preparers best interest to throw you under the bus rather than loose their own ability to practice in front of the IRS. This is why I counsel client’s to distance themselves from their preparers until proper legal tax counsel can be obtained where a possible Tax Crime or even Civil Examination is concerned. CID knows that it is quite difficult to prove a taxpayer’s criminal intent if the preparer takes all the blame for errors on a return. However, this is not likely to occur because preparer’s know that they may become an additional target of your criminal investigation if it appears that he or she conspired with or aided you in making false representations to CID or in preparing false returns.
The special agent generally requests or subpoena’s the accountant’s workpapers used in preparing the returns and takes a statement concerning the records supplied by the taxpayer for the preparation of those returns. Evidence of intent may be found if the taxpayer supplies only summary sheets to the preparer without the underlying data. Since the preparer’s testimony is so critical to CID’s case, I encourage client’s to make sure I am present when he or she is interviewed. If the preparer has his own counsel I will brief them to make sure that the preparer’s testimony is accurate and precise. I will then debrief the preparer and preparer’s counsel after the interview in order to surmise valuable information about the scope and details of CID’s investigation.
REVIEWING TAXPAYER’S BOOKKEEPING
In reviewing the taxpayer’s books and records, CID special agents may find evidence of intent if the books are inadequate, falsified, a duplicate set of books is discovered or the books and records are destroyed prematurely. Unorthodox books, that do not follow generally accepted accounting principles, and other accounting practices that yield deceptive results that understate income or overstate expenses may also be used to indicate criminal intent. If the records are kept by anyone other than the taxpayer, the CID agent may question the accountant extensively about instructions received from the taxpayer on how records should be kept, and also about any indications that may have be communicated to the taxpayer by the bookkeeper or accountant that something was wrong with the taxpayer’s accounting system.
EXAMINING PRIOR YEARS’ RETURNS
The CID special agent will often investigate the taxpayer’s old returns even if the statute of limitations bars prosecution for those years. The IRS will use the old returns to attempt to establish a pattern of underreporting over a substantial period of time, thus evidencing willfulness. These prior returns may also be used to counter a taxpayer’s defense of reliance on an professional, by showing that a pattern of underreporting may have occurred where the taxpayer either prepared their returns personally or employed different return preparers than the professional that prepared the returns at issue. Special attention is paid by CID to the use of and prior fictitious names used by the taxpayer and to any extravagant expenses, since these matters may indicate willful misconduct.
CANVASSING FINANCIAL INSTITUTIONS
Agents use IRS computers to attempt to locate all bank accounts and brokerage accounts in which the taxpayer had any interest. Agents will review the deposits to the accounts discovered in an attempt to locate additional sources of previously unreported income. In some instances an analysis of deposits reveals hidden accounts, which are further evidence of willfulness.13 In other cases, large amounts of business deposits may indicate that income must have been underreported on returns.
