Federal Criminal Tax Matters

Ralph Waldo Emerson once wrote: “Of all debts men are least willing to pay the taxes.” See Emerson, “History” collected in Essays, 1830-1840.

Tax Evasion vs. Tax Avoidance

The latter is legal, and constitute the raison d’etre for an entire industry: millions of financial planners, accountants and wealth management firms, dedicate their lives and considerable resources to avoiding or minimizing tax liabilities for their clients, individuals, business entities, and estates. The former is a Federal Crime.

Tax Evasion vs. Failure to File

Failure to file tax returns is a federal misdemeanor while attempt to evade or defeat tax is a federal felony. See IRC §7201 et seq. The basic elements of Federal tax evasion are “willful existence of a tax deficiency” and an affirmative “act constitution an evasion or attempted evasion of the tax.”

As a practical matter, the IRS is looking for evidence that the taxpayer engaged in knowing concealment, usually over a multi-year period. They take the statements on signed returns and examine underlying financial records, assets, and the like to determine not just a deficiency, but that you purposely concealed that deficiency and often lied on your signed tax return.

Federal Criminal Tax evasion cases usually arise from either the omission from the signed tax returns of unreported income, or the claiming of improper deductions on the signed and filed returns. Filing amended returns after the beginning of a criminal tax investigation does not cure the matter, because the goal of a criminal tax investigation is not the collection of unpaid taxes, but criminal liability.

Criminal vs. Civil Sanctions

Just as there is a difference between tax avoidance and tax evasion, there is an equally important distinction between IRS Civil and IRS Criminal sanctions and investigations. Civil sanctions by themselves, although they can be sizeable, do not result in and of themselves in criminal liability.

However, if you have received a communication from an IRS official the first thing to determine is whether the investigation is criminal or civil in nature. The IRS has a separate criminal investigative unit (IRS-CID), and the agents will readily identify themselves as belonging to such division if you ask.

The Nature of IRS Criminal Investigations

As a whole, IRS Criminal Investigators are highly trained and diligent. They will typically visit the taxpayer, his employees, and family, and elicit statements concerning particular tax returns.

Those statements made by the taxpayer to the IRS investigator, whether concerning a Form 1120 or 1040, sometimes filed years earlier, if determined to be untrue can form the basis for several types of federal criminal charges, including 18 USC § 1001 False Statements. Therefore, it is important to seek legal counsel before making any statements to IRS criminal investigators.

IRS Criminal Investigations cont.: Summonses and Search Warrants

In addition to eliciting statements, IRS criminal investigators will often use their summons power to order records from our clients’ banks, related business entities, customers, and vendors. We have a right to challenge some of those summonses, at least those issued to third-parties, and depending on the situation, we often do. As a practical matter, once we file a motion to quash the third-party summons in the United States District Court the IRS agents are not always able to review the summonsed material until the Motion to Quash summons is heard and ruled upon by a federal district judge. In other cases, it sometimes makes sense to provide requested information without requiring the agents to summons it. Those decisions should be made after careful consideration by a qualified attorney.

In addition to administrative summons, the IRS sometimes executes search warrants upon businesses and residences, usually seizing voluminous paper and digital records, most often entire computers, whose hard drives are then mirrored and copied. These search warrants are intrusive in nature, and a sign that the investigation is in usually an advanced stage.

Parallel Proceedings: Simultaneous Civil & Criminal Tax Investigations

The IRS can sometimes use information it gleans from a civil audit to trigger a criminal tax investigation at a later date. Sometimes the IRS is conducting simultaneous criminal and civil investigations. It is important to determine which type of investigation is occurring, and to avoid making any statements or providing any improper material in a civil investigation that could trigger and be used in a criminal investigation.