IRS Criminal Investigations - Common Pitfalls | Criminal Tax Blog

IRS Criminal Investigations – Common Pitfalls

Criminal Tax Attorneys

The Internal Revenue Service (IRS) is divided into two main branches – the civil and criminal divisions.  The civil division is responsible for conducting routine audits, collections, delivering notices, and any other contact with a taxpayer related to unpaid or unfiled taxes.  The civil division plays a central role in keeping up with taxpayer filings and ensuring accurate amounts are paid by taxpayers each year.

The criminal division is responsible for investigating actions or schemes which may lead to criminal charges.  Most investigations from the criminal division focus on tax fraud, tax evasion, or failing to file/pay one’s taxes.  These three crimes make up the majority of criminal tax investigations in the United States.

The tactics between the two divisions above are vastly different.  With the civil division, a taxpayer is likely to receive letter notices before being assigned a revenue officer to deal with ongoing issues.  This revenue officer will collect information and attempt to work with the taxpayer to resolve their debts.  For lower income citizens, payment plans or offers to compromise the debts may be available.  With the assistance from a civil tax attorney, most taxpayers can navigate this system with no further issues.

The criminal division does not offer the same cooperative climate.  When an agent from the criminal division is assigned, their goal is to obtain evidence to support their assumption that crime is afoot.  There is no collaboration with the criminal division of the IRS.  Unlike the civil division, their goal is not to obtain repayment of an outstanding debt.  Their only role is to develop a criminal case for submission to the Department of Justice.  With that backdrop, it should become clear that taxpayer’s should take any visit or interjection by the criminal division as a serious matter that should be handled with care.

Two Agents at the Door

There are two main procedures for developing a criminal tax case.  The first, and not the focus here, involves the use of a federal grand jury to uncover evidence of a financial crime.  Under that route, a taxpayer’s first indication of a criminal tax investigation will be reception of a target letter from the United States Attorney’s Office in the local district or rumors from friends or colleagues who received grand jury subpoenas for records or testimony.  The grand jury route is discussed in a prior post.  It involves little interaction with the criminal division of the IRS as the investigation is already being dictated by prosecutors with the United States Attorney’s Office and the Department of Justice.

The second route, and the topic of this post, involves a direct investigation by the criminal division of the IRS.  For these investigations, the first indication of a criminal investigation is normally a site visit from two agents at the taxpayer’s home or business.  Criminal tax clients are often not career criminals, have a lot to lose from criminal indictment, and have likely crafted defenses or explanations for any discrepancies in their tax filings.  These particular clients are prone to discussing their tax issues directly with any government agent as they feel they can convince federal agents their presence is a mistake.

With this backdrop, criminal IRS agents prefer to meet with taxpayers before they have had time to find a lawyer for guidance.  This meeting normally consists of two criminal agents appearing at the taxpayer’s front door around 7 or 8 in the morning.  This ensures the taxpayer will be caught off guard and gives the agent the best chance at obtaining information.  At this impromptu meeting, taxpayers often answer questions posed by the agent or show the agent various records related to their income or tax structures.  This evidence is normally a focal point in a later prosecution.

Correct Actions for the Taxpayer

If the criminal division of the IRS shows up at your front door, you should politely decline to answer any questions and let them know your attorney will contact them.  They will provide you with their business cards.  The taxpayer should immediately meet with criminal tax attorneys and hire someone who specializes in this area.  Even armed with this advice, many taxpayers are reluctant to decline agent questions because they believe it will appear they have something to hide.  Taxpayers must remember that the criminal agents are playing a game.  They want you to speak to them without a lawyer present.  That is the entire reason they are at your doorstep at 8 am; instead of contacting you via mail like the civil division.  Refusing to talk to agents will not skew your case towards prosecution.  If anything, it lets the agents know that you are being cautious with your affairs.

The reasons for not talking to agents are plentiful, and most apply even if you really have nothing to hide:

  1. Taxpayers do not know the elements of a criminal tax offense. For instance, most taxpayers are not aware that it is illegal to not file your taxes by the yearly due date.  Further, that such transgression is only criminal if the taxpayer knew of the rules and chose to violate their known legal duty.  Simple questions relating to a taxpayer’s understanding of the tax rules may seem innocuous at first blush, and later pivotal in a criminal tax prosecution.
  2. Certain business records may be privileged and not subject to disclosure to the government. If a taxpayer turns over records to an agent prior to meeting with an attorney, they may have waived their privilege claims to certain documents.
  3. The interviews are not audio recorded. The only record of the conversation is a memorandum of interview written by IRS agents in the hours or days following their contact.  If the IRS agent skews or misinterprets statements during the interview, there is little that can be done.  The taxpayer is now in a he said/she said argument against a federal law enforcement agent.  This battle should be avoided.
  4. Taxpayers are highly unlikely to talk an agent out of criminal charges during any initial interview. The likelihood of a taxpayer stopping a criminal investigation during this interview is nearly zero.  If that can be done, it will be later in the process when they have already hired an attorney and fleshed out the legal issues.
  5. The IRS brings two agents to the meeting. This is done so the government has two potential testifying witnesses to any statements made during the interview.  It only makes sense for the taxpayer to obtain their own witnesses before engaging in that interview.
  6. Criminal IRS agents are far more likely to use aggressive tactics when a taxpayer does not have an attorney. These tactics can lead to admissions that would not otherwise be made.
  7. Most importantly, the taxpayer will have an opportunity to talk to the government at any stage of the investigation. We have never had the government deny a request for a meeting (though it is rare we allow the government access to our clients).  If there is something that needs to be explained, it should be explained in the right environment.  The taxpayer is not missing an opportunity to clarify any misconceptions.

There is no doubt that talking to agents during the impromptu 8 am meeting is an act that should be avoided.  We have never had a criminal tax case where we were better off following client admissions during this interview.  We have had plenty where the statements during this interview sealed the client’s fate.

The Administrative Summons for Records

The criminal division uses summonses to obtain documents for use in the investigation.  The taxpayer will receive copies of summonses sent for their personal records and also, any other summonses forwarded to third parties in relation to the investigation.

Some criminal tax lawyers will issue motions to quash these summonses.  This process allows the attorney to bill the client for hours of work in hopes of preventing the disclosure of information.  The reality is that there is little that can be done to prevent the government from accessing unprivileged information from the taxpayer or third parties.  The better, more efficient practice is to collect all records for taxpayer focused summonses, review for privileges, and turn over documents as required.

Further, the criminal tax attorney should continue to review every third party summons that is provided to ensure they can diagnosis the criminal division’s investigative focus.  Many times, a well placed summons can give the attorney a hint at what transactions or purchases are driving the criminal investigation.

Criminal Tax Investigations

The Administrative Summons for Testimony

In addition to record reception, the criminal division uses summonses to acquire statements from witnesses.  These summonses will request that the person appear at a specific time and date for questioning.  It is very important that these witnesses obtain counsel if they have knowledge of transactions or financials that are tied to the taxpayer.  At early stages, it is difficult to ascertain the true scope of a criminal investigation.  Persons that assume they are witnesses may quickly find themselves in the middle of the criminal tax prosecution.

Once a witness obtains an attorney, the attorney can contact the criminal agent to get further information.  Most times, the agent will assure the attorney that their client is a witness in the case (as opposed to a target or subject).  This assurance normally allows the attorney to advise their client to attend the interview without fear of criminal consequences.  The criminal tax lawyer should attend all interviews with the client to ensure their witness status stays intact and all statements are accurately reported by the agent.

On a side note, attorneys representing witnesses do not have total control over their client’s ability to speak to the government.  If an attorney takes an obstructive approach, the government can merely subpoena the person to appear before a grand jury.  The defense attorney is not allowed into the courtroom during grand jury proceedings.  This requires the client to tread rough waters alone, answering questions under oath, while the attorney waits in the hallway.  This process should generally be avoided for true witnesses (if the client is a target or subject of the investigation then refusal to speak to the government is expected).

Recommendation to the Department of Justice

Once the criminal division finalizes their investigation, they will submit a Special Agent’s Report (SAR) to the Department of Justice for review.  DOJ will assign an attorney to handle the case.  This attorney will reach out to current tax counsel to allow for a conference where legal/factual issues can be presented before a final charging decision is made.  These conferences are a pivotal last call for criminal tax attorneys to steer the train off the criminal tracks.  These conferences should be requested in any case where a legitimate issue is unresolved.  Once DOJ recommends charges to the local prosecutor, it is very difficult to unring the bell.

One Day Too Late

Most criminal tax clients are not veterans of the criminal justice system.  This makes them very susceptible to mistakes during a criminal tax investigation.  Notably, they are geared towards explaining their actions to agents prior to consulting with counsel.  Unfortunately, they are also unlikely to read this post until the day after the two criminal agents have made their visit.

Having said that, I am hopeful that attorneys and taxpayers alike can learn the rules of the playing field in criminal tax cases.  These investigations follow very predictable procedures.  The pitfalls are likewise obvious.  Just remember, the criminal division of the IRS has one main goal – to build a case for presentation to DOJ.  By the time the criminal division is assigned, the case has passed the point of explanation.  It is best that taxpayers allow competent attorneys to guide them through the process.  This gives the taxpayer the best chance at avoiding criminal prosecution.