Our criminal tax attorneys have an active practice representing clients under investigation or criminal indictment for various criminal tax offenses, including tax fraud, filing a false return, tax evasion, and failure to file timely returns. Over 80% of our practice is devoted to federal criminal defense. Criminal tax clients make up the majority of our client base in that area. We understand the rules and procedures, and have successfully defended tax clients during investigations and post-indictment. If you have been contacted by the Criminal Division of the IRS, or face criminal charges, reach out to us today for a consultation. For specific legal questions, you can find answers in our criminal tax blog located here.
Background on the Government’s Criminal Tax Apparatus
The Internal Revenue Service (IRS) has an extensive job in the federal government to ensure business owners pay the taxes required under the Internal Revenue Code. To accomplish this task, the IRS is broken into two distinct divisions – Criminal Investigations Division (CID) and Civil Revenue Division. The division where the case falls will dictate whether civil or criminal tax attorneys are the right fit. The civil division is the arm of the IRS most frequently encountered by taxpayers. This division conducts standard audits, assesses penalties and interest on back taxes, reviews returns for accuracy, and otherwise deals with taxpayers who are not in full compliance with their tax obligations. Civil tax attorneys and CPAs often represent clients undergoing routine IRS intervention from the civil division.
The criminal division only interacts with a taxpayer when their file has been flagged, or referred, for potential criminal activity. The criminal division operates under their own unique procedures with unique goals for enforcement. Every step taken by a CID Agent is aimed at collecting information for use in a later prosecution; this includes attempts to speak with the taxpayer and witnesses and issuing summonses for various documents. If a taxpayer receives documentation or a visit from the CID, their tax problems have gone beyond normal IRS involvement. At that stage, the IRS believes a criminal violation may have been committed. For that reason, it is imperative the taxpayer contact a competent criminal tax attorney for assistance. The sooner the individual or company retains counsel, the better their chance of steering the case away from criminal enforcement.
All criminal tax offenses are found within Title 26 of the United States Code. Though the code accounts for numerous criminal violations, there are four criminal tax offenses that are common in federal prosecutions: 1) tax fraud, 2) tax evasion, 3) failure to file, and 4) failure to pay withholding taxes. These offenses account for the majority of prosecutions nationally, and make up the bulk of the criminal tax violations our firm handles on a yearly basis.
Can a Criminal Tax Case Go Back to the Civil Division?
Most criminal tax investigations begin with a civil audit, or a referral from a bank or an unfriendly peer of the filer. Early in the process, the IRS will be calculating whether the matter should be handled by the civil or criminal divisions of the IRS. If an agent with the CID obtains the case, then a real risk exists that criminal charges will follow. Once a case reaches CID, the goal of any representation is to steer the case back under the civil umbrella. Success in that area removes jail time and hefty financial penalties from the analysis and allows the taxpayer to deal with their back taxes without the cloud of a criminal complaint.
One of the keys to returning a criminal case back to the civil division lies in understanding the DOJ procedures in this area. A criminal tax case will always start with an investigation from an agent with the CID. When the agent’s investigation is complete, they will make a decision on whether the case should be referred to the Department of Justice (DOJ) in D.C. If they choose to make the referral, an attorney with DOJ will review the file and make a recommendation. If DOJ decides to move forward with criminal charges, the case is returned to local counsel for prosecution. Local counsel will make the decision on whether to indict. At each juncture in this road map, a tax filer has the opportunity to challenge the willfulness of their conduct, the accuracy of the government’s numbers, and the proposed tax loss under the IRC.
A competent criminal tax attorney will create legal/mitigation arguments to present to the government at each stage in this process. Those arguments should be presented to the special agent with CID, the DOJ Tax lawyer in D.C., and local counsel in the jurisdiction of prosecution. Those arguments will largely be based on alternative tax loss figures, correcting misunderstandings in the current evidence, legal arguments countering willfulness, and building a “reliance on the advice of an expert” defense. The drawn out nature of DOJ procedures allows ample time for the taxpayer to build their defense and present compelling theories prior to indictment. Depending on their strength, these arguments can be enough to steer the investigation back into the civil division.
Anyone under investigation by the CID needs a competent criminal tax attorney as soon as an agent makes contact. The attorneys at Odom, Davis & Hobson have been handling criminal tax cases for over 40 years. We have walked numerous clients through the process outlined above with good results. We deal with criminal tax cases on a daily basis, and understand the laws and procedures in this area.
How Does a Criminal Tax Attorney Defend the Case?
We have two important goals in any criminal tax case. First, convince the government the case should be handled by the civil department. Second, if the case does end in a criminal indictment, build a defense against the allegations and take the facts before a jury. Our firm has conducted numerous trials for various white collar crimes; including, criminal tax, health care fraud, wire fraud, embezzlement, and money laundering cases. Trial defenses for a criminal tax case are largely built from the mens rea element for the offense – willfulness. For nearly every Title 26 offense, the government must prove the defendant acted willfully. Under that element, the government must prove the taxpayer knew of the legal duty imposed by the tax code, and armed with that knowledge, intentionally chose to violate that duty. This standard is truly unique to criminal tax prosecutions as ignorance of the law is normally not a defense to criminal allegations. We have a more detailed breakdown of the willfulness standard in this article analyzing the Supreme Court’s decision in Cheek v. United States.
Our criminal tax attorneys understand the legal principles from which Title 26 offenses are built. We will craft a defense narrative around those principles forcing the government to show the facts warrant the heightened punishment available under the criminal statutes. Our firm is a trial defense firm at its core, and we are equipped to handle criminal litigation from start to finish. Though our goal is to avoid the risk of trial for the benefit of our clients and their companies.
Does a Taxpayer Have to Pay Restitution in a Criminal Tax Case?
The federal government focuses their criminal resources on taxpayers with large liabilities. The DOJ is not going to criminally target a taxpayer that owes $3,000 to the IRS. As a general rule, the DOJ would like to see a tax loss figure exceeding $75,000 before authorizing criminal action. Given that reality, taxpayer’s under criminal investigation will likely have a substantial tax debt underlying the investigation. The federal government has two main channels to recover the taxes owed. First, the government can use the normal channels within the civil division fof the IRS to recoup the back taxes, penalties, and interest owed on the account. This method can be used even if a taxpayer beats the criminal element. Second, the government can request a restitution order from the District Court mandating full repayment under the criminal case. This second route is only available following a criminal conviction. More details on the statutory grounds for restitution in criminal tax cases can be found here.
Given the prevalence of substantial liabilities in these cases, they should be a central focus in all criminal tax investigations. The taxpayer should begin earmarking funds for debt repayment early on. While a solid defense may prevent criminal charges and lower the stated loss, there is nothing an attorney can do to remove the tax liability underlying the case. The government will always seek to recoup that debt through the civil or criminal process. The inevitability of repayment combined with the potential benefits during the criminal investigation, makes the decision to isolate funds an easy one. Tax repayment can have the following benefits in the criminal process: 1) tax payments can provide leverage in pre-indictment negotiations, 2) payments can undercut the willfulness element in certain cases, and 3) if convicted, paying restitution is a huge factor that will mitigate the final sentence. While the decisions regarding if/when a particular client should repay the tax debt will be made on a case by case basis, the general rule prevails – always set aside funds understanding the tax liability must be paid at some point.
The Role of Tax Loss in Criminal Tax Cases
The tax loss is the amount of money the government lost under the criminal scheme. In a false statement case, the tax loss is determined by comparing the amount of taxes paid under the false return to the amount of taxes that should have been paid if an accurate return was filed. Let’s assume a taxpayer filed a return setting his taxable income at $100,000 and paid $20,000 in taxes. After investigation, the IRS determines that an accurate return would have shown taxable income of $1,000,000 and a tax liaiblity of $300,000. Under those facts, the tax loss would be $280,000. If the taxpayer did similar actions for five years, they could quickly balloon the tax loss to over $1 million.
The tax loss is the driving force in criminal tax cases. As discussed above, the tax loss is a key factor in the DOJs decision to charge a taxpayer criminally. As tax loss goes up, so does the DOJ’s excitement to expend criminal resources on the case. In addition to charging decisions, the tax loss is the leading factor at sentencing. Under the sentencing guidelines, the recommended sentence for a criminal tax offense is almost exclusively dictated by the loss associated with the scheme.
For these reasons, determining an accurate tax loss is central to any criminal tax representation. While the IRS is often solid at calcualting tax deficiencies, they often make mistakes. The government does not always have enough information to determine whether a particular payment is income. Or whether a specific debit is a valid business expense. The IRS is also unlikely to employ tax practices that lower the overall tax debt (shareholder loans, depreciation, and loss carry forwards). For these reasons, it is imperative that a taxpayer retains a competent CPA/accountant to calculate tax loss. We have had cases where the tax loss has gone down by $100,000s after our experts challenged the IRS’ figures. That drop in tax loss reverberates through the entire case, including the charging decisions, the recommended sentence, and the resitution amount.
Click the following link to find more information on hiring an accountant while under a criminal tax investigation.
Recent Results from our Criminal Tax Attorneys
In 2019, Brian Hobson and Wendell Odom successfully pulled two cases out of the CID and back under civil audit. Both cases involved allegations of businesses underreporting income. Both clients are no longer in the criminal system, and prison time is off the table.
In 2020, Brian Hobson represented a business owner in Houston. He was charged with failing to report substantial income. The alleged tax loss exceeded $1,000,000. Brian and the hired accountant were able to rework the numbers for the business to show the true tax loss was less than $100,000. This recalculation took the client from a five year recommended prison sentence to five years probation. Further, it drastically altered the restitution the client was asked to pay. Following the case, the client continued operating his business and has been in compliance with the tax laws since.
In 2021, Brian Hobson and Wendell Odom were hired to represent a business owner charged with tax fraud in the Western District of Texas – Austin Division. The case was set for trial in September of 2021. After careful review of the client’s records, it was clear any inaccuracies in reporting were not willful as required under the tax fraud statute. We discussed these issues with the government, and they agreed to dismiss all charges against the business owner. Dismissals are exceptionally rare in the federal system. The client is now free to continue operating his business and jail time is off the table.
In 2022, Brian Hobson represented a business owner in West Texas for failing to pay FICA taxes withheld from employee paychecks. The alleged tax loss was $5,900,000 and the client faced a potential 60 year sentence in federal custody. We developed substantial mitigation, and following a sentencing hearing, the client was sentenced to five years probation. The client was free to continue operating his business and returned home to his family.
In 2023, Brian Hobson and Wendell Odom were retained to represent an attorney under investigation by the CID arm of the IRS. The IRS was pursuing a criminal case related to the attorney’s failure to report income from his portion of case settlements in a personal injury firm. After review of the client’s records, it was clear the client had reported all income as required by the tax code. The CID shut down the criminal probe and returned the case to the civil division of the IRS. The client was free to continue running his business.
Leave your criminal tax case in the hands of qualified criminal tax attorneys.
Contact us today for a consultation.
Our attorneys write extensively on issues relating to criminal tax defense. Those articles can be found at the Criminal Tax Defense Blog.
Further information can be found on our page crypto tax defense: