Under the law, statutory authority exists for the Secretary of the Treasury and the Attorney General to compromise criminal tax cases without prosecution. However, this authority to compromise criminal cases is rarely used because allowing a defendant to buy his way out of criminal prosecutions would in effect create separate systems of justice for the rich and the poor.
Defense counsel may attempt to convince CID or Grand Jury investigators that his or her client is much more valuable to them as a witness against other potential or actual targets than as a criminal tax defendant. As a witness for the prosecution, the defense counsel’s client may receive a grant of use immunity, under which he or she cooperates fully with the IRS in exchange for an agreement that charges will not brought against him or her. Complete immunity from prosecution arising out of a transaction is called transactional or pocket immunity. Although courts have historically expressed displeasure with pocket immunity it currently continues to be routinely granted.
It is important to note that testifying under a grant of immunity is not without risks. Witnesses who receives immunity are prohibited from subsequently refusing to testify on the grounds that they might incriminate themselves. Moreover, if a case can be built against the immunized witness on evidence that is independent of the immunized testimony, the immunized witness may still face criminal prosecution. Lastly, testimony subsequently proven to be perjured, given under a grant of use immunity can also be used against the witness who made the false statements.
Historically, by far the vast majority of the criminal tax indictments brought result in pleas. Each U.S. Attorney is authorized to accept a plea of guilty to the major count of an indictment without prior approval of the IRS. Federal prosecutors are required to initially charge the most serious, readily provable offenses that are consistent with the defendant’s alleged conduct. Typically, once charges are brought, they will not be dismissed or dropped under a plea agreement unless the prosecutor has a good faith doubt about the government’s ability to prove a charge based on either a perceived legal or evidentiary weakness in the case.
By contrast, the IRS does not typically settle civil tax matters as part of a plea agreement although it has the statutory authority to do so. This rational for this is to avoid the appearance that the IRS uses the criminal process to coerce the collection of civil tax liabilities. This policy does not prevent the defendant from agreeing to civil admissions, such as receiving unreported income or claiming fraudulent deductions, as part of the criminal plea agreement. Information that the taxpayer provides in a civil case may also be used in a criminal case against the taxpayer. Thus, cooperating with a criminal investigation with or without proper legal counsel may have unexpected drawbacks for the taxpayer.
A civil examiner is required to refer a case to the Criminal Investigation Division (CID) as soon as a firm indication of fraud is discovered in order to protect the taxpayer’s fifth amendment rights against self incrimination and fourth amendment right against unreasonable searches and seizures. Thus, a civil examination should be immediately suspended while the IRS pursues a criminal tax investigation. However this is occasionally not the case.
Consequently, tax defense counsel should endeavor to prevent their client’s from offering testimony or evidence during a civil examination where it is indicative or probative of criminal intent, including making false statements and creating any record or displaying conduct that is likely to mislead or conceal especially in cases where there is an arguable Fifth Amendment claim. On the other hand, once a civil examination has begun, a taxpayer’s failure to make books and records unconditionally available to the examining agent may result in referral of the matter for criminal investigation. To this end, I routinely counsel my client’s that when speaking to a civil examiner they only have two choices: 1. Tell the truth! 2. Remain silent!
A substantial majority of reported convictions in criminal tax cases involve taxpayers who cooperated fully early in the investigation, without counsel, and either lied or made damaging admissions to CID agents. CID agents have the advantage during the first interview: they have prepared, they have reviewed tax returns, and they know the direction and scope of the investigation, consequently unrepresented taxpayers are at a distinct disadvantage.
A couple of cases are illustrative of the case law in this area that defense counsel can use to his client’s advantage:
In one notable case, taxpayer’s counsel argued that the evidence gathered by the examining agent was inadmissible in a subsequent criminal trial because there had been firm indications of fraud from the beginning of the audit and thus the audit should have been suspended pending a referral of the case to CID which would have put the taxpayer on notice of his criminal tax exposure. The Seventh Circuit held that the consensual search at the exam level was unreasonable under the Fourth Amendment and violated the due process clause of the Fifth Amendment because the taxpayer’s consent was induced by fraud, deceit, trickery or misrepresentation by the examining agent. To prevail under this line of case law, Tax Defense Counsel must establish that the agent affirmatively misled the taxpayer about the investigation and that this deceit was a material factor in the taxpayer’s decision to give information to the agent.
In another illustrative criminal tax case, to find out whether his client’s ongoing investigation was criminal or civil, the taxpayer’s attorney asked the examining agent whether a CID agent was involved in the investigation. The agent correctly responded that no special agent was involved. The Fifth Circuit held that records turned over by the taxpayer’s attorney to the agent could not later be used in a criminal tax case against the taxpayer because the agent deliberately deceived the taxpayer’s attorney by not informing him of the criminal nature of the investigation even though his previous statement was correct. The court held that his deception invalidated the taxpayer’s consent to the examination of his records and made the examination an unreasonable search and seizure in violation of the Fourth Amendment.
By contrast, in another illustrative civil case (non criminal) before the Tax Court, the Tax Court refused to bar the use of evidence collected in a criminal investigation that was disguised as a civil audit because the taxpayer was aware that the information could be used in a civil case.
In some instances, moreover, the taxpayer’s tax defense counsel may object to the agent’s summonses based on protections of confidentiality that may apply to tax advice given by a federally authorized tax practitioner. The privilege may be asserted only in any noncriminal tax matter before the IRS or in any noncriminal tax proceeding in federal court brought by or against the United States.
Because of the case law surrounding the fourth and fifth amendments in the tax arena, cooperation with CID special agents may not be the best tactic for every taxpayer and the decision to do so is best left to competent tax defense counsel. For some situations, a more appropriate course of action is to monitor and anticipate the course of an investigation in the hopes of limiting or where possible eliminating potential criminal tax exposure. To this end, potential witnesses can be interviewed by the taxpayer’s tax defense counsel, or an investigator hired by counsel, before the CID special agent has made contact. Defense counsel should warn taxpayers under CID investigation that statements made to business associates, friends, his accountant, or an investigator may be passed on to the special agent because they are not privileged communications. An accountant who was not the preparer of the returns being investigated or investigator should be hired under the protection of a “Kovel” letter in attempt to bring the work of the accountant or investigator within the attorney client privilege by the taxpayer’s tax defense counsel to assist in following the special agent’s progress and in preparing a defense. The communication between the accountant or investigator and the taxpayer can be protected by the attorney-client privilege if specified conditions are met. The attorney must formally retain the accountant to assist the attorney in rendering legal services to the taxpayer, not merely providing accounting services. The retention letter must confirm the reason for the retention, that communications between the accountant and the attorney’s client are confidential and only made to assist the attorney in giving legal advice, and that records created by the accountant belong to the attorney.
If tax defense counsel can prove that a government agent induced a taxpayer to commit a tax crime that the taxpayer otherwise would not have committed, the defense of entrapment may be available. However, merely allowing a taxpayer to continue criminal conduct that was already started is not entrapment. The key to this defense is that the disposition to commit the crime must come from the government agent and not the taxpayer.
There are two elements to the defense of entrapment: 1. the government induced the crime, and 2. no predisposition to commit the crime is evident on the part of the defendant. To establish inducement as a matter of law, the defense counsel must be able to produce undisputed evidence making it patently clear that the government induced an otherwise innocent the defendant to commit the illegal act by trickery, persuasion, or fraud on the part of a government agent. If tax defense counsel meets this burden, then the prosecution must then prove beyond a reasonable doubt that the defendant was predisposed to commit the crime prior to first being approached by government agents. Case law shows that five factors are relevant to determining such a predisposition: (1) the defendant’s character and reputation; (2) whether in fact the government initially suggested criminal activity; (3) whether the defendant engaged in the activity for profit; (4) whether the defendant showed any reluctance; and (5) the nature of the government’s inducement.
Each specific tax crime has its own statue of limitations which establishes a time frame under which a criminal charge must be brought or else the charge is mute under law. However, before this defense is relied upon it must be noted that under specified circumstances, the statute of limitations may be extended. For example, when a taxpayer’s tax counsel brings or intervenes in an action to quash an IRS summons issued to a third-party record-keeper, the statute of limitations for criminal prosecution of that taxpayer is suspended for the period during which the proceeding (including appeals) concerning enforcement of the summons is pending. As an additional example, the statute is also suspended for the period that the person committing an offense is outside the United States or is a fugitive from justice.
During administrative review level of potential criminal prosecution cases, effective tax defense counsel has the ability to raise several defenses that if successful may cause case to be declined. These include lack of criminal intent, no tax due, defects in method of proof, dual prosecution, health, and the improbability of a conviction. A taxpayer may avoid prosecution by showing that he was previously prosecuted for substantially the same acts. The poor health of a taxpayer will not prevent prosecution. However, if poor health and other factors creating sympathy for the taxpayer make it unlikely that the taxpayer will be convicted, prosecution may be declined.
Proving that a taxpayer acted intentionally in violation of a known legal duty is a critical element of most of the government’s criminal tax cases and is often the most difficult one for the prosecution to prove. In the absence of a confession or the testimony of an accomplice, intent usually must be established by circumstantial evidence concerning the taxpayer’s actions. The admissibility of circumstantial evidence is frequently a close question that criminal tax counsel can endeavor to suppress. Questions concerning the admissibility of evidence of intent are best raised with the tax defense counsel at both the Tax Division of the Justice Department and the U.S. Attorney’s office, since both organizations are bound by guidelines and experience that encourage them to consider declination if the only admissible evidence of intent is that of carelessness.
When the IRS relies on indirect or circumstantial methods of proof, guidelines established by the courts establish safeguards that must be complied with in the use of that circumstantial evidence. Effective Tax Counsel can ensure that these safeguards are complied with.
Both the IRS and the Department of Justice regard the probability of conviction to be an important standard of review. A number of factors that are not sufficient by themselves to cause declination, when viewed together, might be sufficient reason to decline a case. A combination of a health condition, personal tragedy, and prepayment of liabilities could form the basis for declination. If a physical or mental health defense is raised, it should be supported by a medical opinion letter, medical records, and the curriculum vitae of the medical professional who treated the taxpayer.
Defendants occasionally allege that they have been the victims of unlawful selective prosecution in tax cases by the government. These allegations are historically summarily dismissed. To prove unconstitutional selective prosecution the defendant must establish that others similarly situated have not been prosecuted and the decision to prosecute was based upon an impermissible consideration such as race, religion, or the desire to prevent the exercise of constitutional rights which places an almost impossible burden on the defendant.
When a criminal prosecution is based on a taxpayer’s failure to report income, the government must establish that the taxpayer knew that the income was taxable. Therefore a claim that no tax is due because the taxpayer has paid the tax following commencement of the audit or now stands ready to pay all deficiencies and penalties is unlikely to prevent prosecution of the taxpayer. Payment after an audit or investigation has begun does not change the fact that the crime was complete at the time the taxpayer violated a known legal duty. However, Proving additional deductible expenses can reduce the tax deficiency and make a case less attractive for prosecution. Note however that the filing of amended returns and paying the tax due to correct previous criminal actions before an audit has begun under a Voluntary Disclosure can be quite effective at preventing criminal prosecution.
A good faith belief that the tax laws are unconstitutional does not negate willfulness.