Observations On Criminal Tax Investigations

In order to successfully prosecute a tax crime the Government must have at hand proof of a certain quality. It has to be certain that it can establish the existence, beyond a reasonable doubt, of each of the "elements" of the crime it has charged as having been committed. Facts established during a criminal tax investigation become the basis upon which the Internal Revenue Service may recommend to the Department of Justice that it proceed to prosecute a taxpayer for the commission of a tax crime. Until the case is referred to the Department of Justice, the case is not considered to be in the hands of "the Government" for a criminal offense.

There are fine distinctions that often prevent a case from proceeding to the point of a criminal prosecution recommendation out of the Criminal Investigation Division of the Internal Revenue Service to its own Office of Chief Counsel, and from there to the Department of Justice, Tax Division. The law supports the notion that the IRS still has a "civil purpose" towards a taxpayer under criminal investigation. In this context, the Internal Revenue Service as an agency of government clearly has the edge in virtually every criminal investigation. It has a right to demand all evidence in the possession of the taxpayer or third parties. The courts have indeed swept away any defenses to production of books, records, writings, statements to third parties, work product of accountants and/or other advisors, whether in connection with the preparation of tax returns or otherwise. The only protections remaining during a criminal investigation are those protecting most confidential communications to one's attorney under the attorney-client privilege and the protection couched in terms of the government not being able to coerce self-incriminating statements from the taxpayer's own lips.

In the area of summons enforcement, the Internal Revenue Service as an agency of "the Government" has the edge in tax investigations. Since virtually nothing in the nature of a book or record or third party document that is "relevant" to a tax investigation can escape the reach of the IRS during a criminal investigation, virtually everything is discoverable to make the determination whether the evidence supports proof beyond a reasonable doubt of a tax crime. The United States Supreme Court has recognized that the IRS is an institution committed to determine the tax liability of taxpayers. Moreover, as stated above, it has held that a criminal investigation in contemplation of law always has a civil purpose until referred to the Department of Justice with a recommendation for criminal prosecution. LaSalle National Bank, 437 U.S. 298 (1978). Even where an IRS Special Agent represents to a taxpayer under investigation that on such-and-such a ground the agent has proof beyond a reasonable doubt of the commission of tax crimes, the line between civil and criminal has not been crossed.

Current IRS procedure allows the Criminal Investigation Division the final say on whether a case recommended for prosecution, even though the IRS's Office of Chief Counsel has given its opinion against that recommendation. This procedure was not in force at the time that the Supreme Court enunciated the rule that a tax case was a civil case at all times before it had been referred for prosecution. At the time that the Supreme Court enunciated that rule, IRS Chief Counsel had to approve a recommendation for prosecution before a case would be forwarded to the Department of Justice for prosecution. However, even the, the Criminal Investigation Division could prevail upon the Department of Justice to accept a case. The Department of Justice in any case, now as then, can refuse to support the recommendation and send the case back to the Internal Revenue Service for civil disposition.

Theodore L. Craft