United States: Defense Practice In Internal Revenue Service Criminal Tax Investigations

One of the first steps by the special agent in a criminal tax case is to attempt an interview with the person under investigation. Another agent of the IRS accompanies the special agent as a witness during this interview and any other contacts with the subject.

Typically, the special agent and his witness will, without prior notice, call upon the person under investigation at his or her home or place of business for an interview. If the subject of an investigation submits to an interview, it is frequently not only the beginning, but also essentially the end of the investigation.

The special agent will identify himself, display his credentials (including a gold badge), and if all goes according to script, he will advise the individual that they are under investigation for possible criminal tax violations. He will recite partial Miranda warnings, advise that the person may seek the assistance of an attorney before responding to questions, and will inquire whether the taxpayer understands those rights.

At that stage, anyone's response should be an entirely acceptable and unqualified, "I wish to consult legal counsel before answering any questions." Upon hearing that response, the special agent and witness should promptly depart, although before doing so, the special agent may issue an administrative summons requiring an appearance not less than ten days from that date to give testimony under oath or provide business records that may be relevant or material to the investigation.

Immediately upon the special agent's departure, an attorney experienced in criminal tax matters should be engaged to review all relevant evidence and to advise the client. Only if the attorney concludes that it is worth the risk of co-operating and giving information in the likely expectation of halting the investigation, should the client be permitted to answer questions or provide information to the special agent. Regrettably, however, at this most critical point of the investigation - the initial interview - many clients will be so intimidated by the sudden appearance of the special agents and by being advised of their constitutional rights that they will completely break down from guilt or fear and confess to matters which may constitute criminal tax violations. Some other clients may foolishly believe that they can 'explain things,' and in trying to do so will disclose information which effectively makes the government's criminal case. These are, of course, the worst possible reactions - far worse than simply declining to answer any questions until advice of tax counsel is obtained.

An attorney engaged to represent the client will typically advise the taxpayer not to answer any of the special agent's questions, not to make any statements or to provide the special agent any written information without prior legal advice. If the client has already been interviewed by the special agent, he should be instructed to have no further contact with the special agent, and not to discuss any aspect of the investigation with anyone except his attorney.

As soon as possible, the client should be requested to execute an IRS Form 2848, Power of Attorney, designating the attorney as attorney-in-fact to perform any and all acts, which the client can perform with respect to the tax investigation. The completed and signed IRS Form 2848 should be filed with the special agent as soon as possible. At the same time, the special agent should be directed in writing to make no further contact with the client and told that any further contacts should be with legal counsel. Further, the special agent should be requested to provide the attorney all notices for any third-party administrative summonses served in the investigation. These notices offer the client an opportunity to legally challenge the appropriateness or legality of the summonses and provide information on the direction of the investigation.

If possible, it should be determined if the investigation is an IRS administrative investigation, or is being conducted through the use of a federal grand jury. In a grand jury investigation, IRS special agents serve grand jury subpoenas as opposed to administrative summonses. In an IRS administrative investigation, IRS must provide notice to the taxpayer of summonses issued to third parties. Witnesses can be compelled to testify and, if necessary, granted immunity from prosecution in exchange for their testimony.

Information obtained during a grand jury investigation generally cannot be used for civil purposes unless the information becomes public through court proceedings or by court order. Grand jury investigations generally indicate that IRS suspects the taxpayer is deriving income from, or is involved in, an illegal activity.

The client should be thoroughly interviewed by the attorney to determine the basis for the investigation and also requested to provide personal and business financial records, copies of tax returns, correspondence and other documentary information relevant to the investigation. It is particularly critical to determine the nature of any information the client may have previously provided the IRS. If the client has provided false or misleading information to a special agent, this will be used to establish wilful intent, a required element of most tax crimes. Also, many times the nature of questions posed by IRS agents will provide insight into what is being investigated and the identities of potential witnesses.

All potential government witnesses, as well as selected family members, employees, or business associates who might provide helpful or damaging information, should be identified and interviewed by the attorney or a "Kovel" expert. In United States v. Kovel, the court ruled that an attorney may engage certain experts to assist in the defense of a client, and that communications with such Kovel expert are protected by the attorney-client privilege. Most attorneys find it extremely helpful to engage a forensic accounting expert with experience in criminal tax matters and litigation support for the purpose of interviewing the client and potential witnesses, analysing financial and tax data, developing strategy, advising on plea negotiations, and assisting during trial.

During the course of any defense witness interview, the witness should be interrogated as to the line of questioning followed by the IRS agents in addition to obtaining all relevant factual information regarding the client's financial and tax affairs. If any witness has provided a verbatim statement to IRS investigators, the witness should be asked to request a copy of that statement from the IRS and to make it available to the defense.

The individual who prepared the client's tax returns should be interviewed to ascertain their correctness and to identify any problem areas. Generally, the return preparer will be a critical witness for the government, and IRS will try early in the investigation to extricate such witness from any culpability for false tax returns or other like wrongdoing. For this reason, it is extremely important to assess the competency of the accountant, bookkeeper, CPA or other return preparer and to explore the relationship and communication level between the client and any such individual in order to identify any potential defenses.

The client's financial lifestyle should be evaluated to determine if it is commensurate with reported income and available non-taxable sources. If discrepancies are identified, explanations should be requested from the client or third parties where appropriate. To assist in this evaluation, IRS transcript information can be requested if authorised by the client using IRS Form 8821, Tax Information Authorisation, to determine if any reports have been filed with IRS reflecting the client's use of cash. Generally, financial institutions and businesses must report all cash transactions in excess of $10,000. Any declared transportation of currency into or out of the United States in excess of $10,000 is reported to IRS as well.

In some situations where the currency is less than the $10,000 threshold, it can be considered suspicious, and financial institutions may report it.

If, after evaluating all available information it appears that any chance of a successful prosecution is remote, a meeting should be requested with IRS agents to provide information that will explain certain issues or provide sound legal and factual defenses to any alleged criminal conduct. Extreme care should be exercised at this point in that only corroborated or verifiable information is offered. An attorney should not rely solely on a client's explanation since the offering of incorrect or false information may be viewed as an attempt to mislead the agent and will be used against the client in documenting the requisite wilful intent, an element of almost all tax crimes. There is nothing worse than for a client to provide false information to IRS agents either directly or through his attorney.

If an evaluation of the facts and evidence reveals that there is little chance of successfully defending against prosecution, it may be in the client's interest to request an "expedited plea" to an offense. IRS and the Department of Justice (DOJ) sanction this procedure, but DOJ must approve any negotiated plea. Defense counsel must first request it and it is available only to clients who are considered not to be involved in illegal activity other than tax offenses. The advantage of this approach to the client is that the government is usually willing to offer favourable terms in such situations, and the legal expense to the client is greatly reduced.

Upon completion of the investigation, the investigating special agent will prepare a final report and make a recommendation either to discontinue the investigation or to recommend prosecution. Cases recommended for prosecution undergo a rigorous internal CID review, and ultimately a thorough legal review by the DOJ Tax Division. When appropriate, conferences should be sought at this level to offer defenses or legal positions in an effort to ward off prosecution before the case is forwarded to the United States Attorney responsible for initiating prosecution.

If the case is forwarded to the United States Attorney, a meeting should be requested to discuss the case with an assigned Assistant United States Attorney (AUSA) and a further attempt to dissuade against prosecution should be made. If the AUSA intends to institute charges and the offenses are at the felony level, counsel should consider waiving indictment and allow the filing of criminal information. This usually will result in less adverse publicity for the client.

Discussions with the AUSA should include the government's position with respect to a plea, the client's appearance at arraignment after charges are brought, the type of bond to be requested and an agreement as to when and how disclosure of the government's evidence will be made available to the defense.

After evaluating the government's evidence, discussions should take place between the client and the attorney as to a possible plea, as well as the chances of prevailing at trial. Along with an assessment of the evidence, each client's personal, business and financial situation should be factored into a final decision and each case will generally stand alone.

In addition to having the sole responsibility for investigating federal tax violations, IRS special agents also investigate money-laundering offenses (Title 18, U.S. C., Section 1956) and currency crimes (Title 31, U.S.C.) These crimes generally go hand-in-hand with criminal tax investigations and in some instances carry even greater criminal and civil penalties, including the seizure and forfeiture of assets.

In fiscal year 1999, 80% of all CID investigations initiated resulted in a prosecution recommendation, and 75% of all such total investigations initiated resulted in an indictment. Of all those convicted and sentenced, the average prison term was 13 months. While it would appear that not all tax investigations and prosecutions are slam-dunk scores for the prosecution, these high percentages strongly indicate that anyone facing a criminal tax investigation should retain experienced legal counsel at the earliest opportunity to effectively exercise constitutional and other federally recognised rights and privileges.