United States: Defense Practice In IRS Criminal Tax Investigations

One of the first steps by the special agent in a criminal tax case is to attempt to interview the person under investigation (the subject). Another agent of IRS accompanies the special agent as a witness during this interview or 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 person under 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 that the person is 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 person understands those rights.

At that stage, the response of the person under investigation 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 such testimony under oath as 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 person under investigation. Only if such tax counsel concludes that it is worth the risk of cooperating and giving information to the special agent in the likely expectation of halting the investigation, should the person under investigation answer questions or provide information to the special agent. Regrettably, however, at this most critical point of the investigation - the initial interview - many persons under investigation will be so intimidated by the sudden appearance of the special agent, and particularly the reading of the partial Miranda warnings, that they will completely break down from guilt or fear and confess to matters which may constitute criminal tax violations. Other such persons 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.

Tax counsel engaged to represent the person under investigation will typically advise the taxpayer not to answer any questions of the special agent, not to make any statements and not to provide the special agent any written information without tax counsel’s prior advice. If the special agent has already interviewed the person under investigation, he should be instructed to have no further contact with the special agent and to discuss with no one except tax counsel any aspect of the investigation.

As soon as possible, the person under investigation should be requested to execute an IRS Form 2848, Power of Attorney, designating his attorney as his 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 by tax counsel to make no further contact with the client and to direct to tax counsel any further contact relating to the person under investigation. Further, the special agent should be requested to provide to tax counsel 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 summons and provide information on the direction of the investigation.

If possible, it should be determined whether 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. Investigations conducted with the use of a grand jury generally indicate that the IRS suspects that the taxpayer is deriving income from or is involved in illegal activity.

The client should be thoroughly interviewed by tax counsel to determine the basis for the investigation and also requested to provide personal 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 to the IRS. 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. If the client has provided false or misleading information to a special agent, this may be used to establish willful intent, a required element of most tax crimes.

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 tax counsel or by a Kovel expert engaged by tax counsel. 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 expert with experience in criminal tax matters and litigation support for the purpose of interviewing the client and potential witnesses, analyzing financial 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, such 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 the correctness of the tax returns 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 nontaxable 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 by the client using IRS form 8821, Authorization to Release Tax Information, 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 the IRS agents to provide information to explain certain issues or to 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 may be used against the client in documenting the requisite willful intent, an element of almost all tax crimes. There is little worse for a client than 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 any illegal activity other than tax offenses. The advantage to the client of this approach is that the government is usually willing to offer favorable 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 may 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 who is responsible for initiating prosecution.

If the case is forwarded to the United States Attorney, a meeting should be requested to discuss the case with the Assistant United States Attorney (AUSA) to whom it has been assigned and again attempt to dissuade against prosecution. If the AUSA intends to institute charges and the offenses are at the felony level, tax counsel should consider waiving indictment to allow the filing of a criminal information in lieu of obtaining a grand jury indictment. 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, tax counsel will initiate discussions with the client as to a possible plea as well as the chances of prevailing at trial. Along with tax counsel’s assessment of the evidence, each client’s personal, business and financial situations 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 of those convicted and sentenced, the average prison term was 13 months.

While is 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 recognized rights and privileges.