Criminal Tax Investigations: An Overview for Accountants

The first thing for C.P.A.s, accountants, enrolled agents and tax preparers need to understand when one of their clients is under criminal investigation for tax fraud is

THERE IS NO PRIVILEGE!

Accountants should not discuss the criminal case with their client. Conversations between accountants and clients are not privileged and you could be compelled to disclose the substance of these conversations at a later date.

Now that we are clear on not talking to your client about the criminal investigation, let’s review what the government is doing to develop their criminal tax case.Boston Tax Attorney Blog Tax Fraud

Warning Signs that Your Client Is Under Criminal Investigation:

Generally, you and your client may not know they are under criminal investigation by the Internal Revenue Service until criminal charges have been filed. You may be tipped off that a criminal investigation is ongoing if:

  • The IRS does not typically conduct parallel civil and criminal investigations. Revenue Agents and Revenue Officers work with “Fraud Referral Specialists” that assist in the development of cases and provide advice as to when a case should be referred to the Criminal Investigation Division. If your client’s civil tax investigation is suddenly suspended, it may mean the government is starting a criminal investigation.
  • “Eggshell Audits” The IRS may select a taxpayer for a civil audit if there is evidence of one or more false returns being filed (e.g. reported income is less than amounts reported on 1099s) –  the purpose of the “Eggshell Audit” is to develop evidence that may be used to bring criminal charges.
  • The IRS wants to interview you.
  • Your client’s bank records, credit card statements, phone history is summoned. The IRS is required to provide the taxpayer with notice when it issues administrative summons to third parties for records.

What Crimes Do the IRS Investigate?

The IRS investigates criminal cases through administrative investigations and grand jury investigations. Administrative investigations are conducted solely by the IRS without the assistance of the U.S. Attorney’s Office or other federal law enforcement agencies.

The Internal Revenue Service Criminal Investigation Division investigates alleged violations of:

  • Criminal Tax Statutes
    • Tax Evasion 26 U.S.C. § 7201
    • Making or Subscribing a False Return 26 U.S.C. § 7206(1)
    • Aiding and Assisting in the Submission of a False Return 26 U.S.C. § 7206(2)
    • Conspiracy to Impede and Impair the IRS 18 U.S.C. § 371 (Klein Conspiracy)
    • Obstruction the Internal Revenue Service 26 U.S.C. § 7212(a)
  •  The Bank Secrecy Act
  • Money Laundering Statutes

Methods of Proof in Criminal Tax Cases

In a civil case, the burden of proof is on the taxpayer. In a criminal case, the burden of proof is on the government. Methods of proof used in a criminal case include:

  • Specific Items Method of Proof – IRS establishes that a tax return is false or a tax is due and owing by identifying specific items of unreported income or improper deductions.
  • Net Worth Method of Proof – IRS establishes that an increase in a taxpayer’s net worth was caused by unreported taxable income.
  • Expenditures Method of Proof – IRS establishes that a taxpayer’s expenditures in a given year exceeded reported taxable income.
  • Bank Deposits Method of Proof – IRS establishes that deposits made into bank accounts controlled by the taxpayer exceeds reported taxable income.

Criminal Tax Statutes – Statute of Limitations

In a civil case, the IRS usually has three years after a taxpayer files a return to conduct an audit. In a criminal case, the IRS has twice a long and maybe even more time.

  • Unlike the civil statute of limitations, criminal tax statues are subject to a six year statute of limitations.
  • The statute of limitations is triggered by the last affirmative act of tax evasion for a particular tax year.
  • In false return cases, the statute of limitations runs from the date the return was filed or the statutory due date if the return is filed early.
  • The statute of limitations is extended if the taxpayer files an extension of time to file.

What Should Accountants Consider When Their Clients Are Being Investigated for Tax Crimes?

When your client is under investigation for a tax crime, accountants should recognize how you can and cannot help your client and what the ramifications may be for you and your practice.

  • Do not talk to your client about the criminal investigation.
  • Federal law does not recognize the accountant/client privilege – conversations you have with your client may be subject to discovery.
  • Do not assume that you know the full scope of the investigation or that your client has disclosed to you all of the relevant facts.
  • Advise your client to consult with counsel and maintain all of the relevant documents.
  • The IRS may use evidence developed during an audit to prosecute a taxpayer.
  • You may be a key witness (or even a defendant) in a criminal case.
  • Consult you own counsel – if appropriate, have your counsel notify the IRS and the U.S. Attorney’s Office that you are represented by counsel.
  • Determine whether you should continue working for the taxpayer.

The High Stakes of Criminal Tax Investigations

Criminal investigations are thorough and intensive often taking up to a year to complete. Once the IRS starts a criminal investigation, your client cannot pay their way out of it. The government has already made the decision that collection of the tax is secondary to prosecuting the tax crime. Understanding the process will help you and your client prepare the best defense.

Related Posts

Criminal Tax Investigations Start Long Before You Receive a Knock on the Door – How does a criminal tax investigation start and who is involved?

More than Jail Time: Additional Penalties and Restrictions Resulting from a Criminal Tax Conviction -When an individual is convicted of a tax crime or any crime, there is more than just jail time to worry about. Whether facing trial or negotiating a plea agreement, attorneys and defendants should consider the additional penalties that may result from a conviction.

Average Prison Sentence in Criminal Tax Cases Gets Longer – The average prison sentence for an individual convicted in a federal tax case has increased from 25 months (FY 2001-2008) to 27 months (FY 2009-2013).

Leave a Reply

Your email address will not be published. Required fields are marked *