Boston criminal tax investigation lawyer Theodore L. Craft is an expert in the proof elements, privileges and presumptions arising in the area of Internal Revenue Service (IRS) criminal tax investigations. His 30 years of knowledge dealing with criminal tax cases lends credibility to a client’s case and comfort to the client. Attorney Craft is a member of the American Bar Association's Criminal Justice, Tax and Litigation Sections.
Assistance Prior to Commencement of Criminal Tax Investigation
Part of Attorney Craft's criminal tax practice is advising taxpayers whose acts or omissions have the potential to become chargeable by the IRS (through an investigative report issued by the IRS Criminal Investigation Division) as crimes, and prosecuted in federal district court by the Department of Justice (to which the IRS refers a case for criminal prosecution).
Prior Tax Fraud and Voluntary Disclosure
Many potential tax fraud scenarios are not yet under criminal investigation. If the client wants to disclose a prior tax fraud there can be no assurance that he will not be prosecuted. However, criminal tax liability based on fraud may be avoided in some cases.
For example, filing amended or delinquent tax returns before the IRS has begun an inquiry might be undertaken. Such an undertaking might begin with an explanatory letter or such other initiative to lead IRS to the discovery of a fraud. A “voluntary disclosure” must be approached with the knowledge that it is not a panacea. The courts have held that the filing of an amended or delinquent tax return raises no legal impediment to prosecution for tax fraud or criminal failure to file.
Tax evasion, or the willful filing of false returns, are felonies. These crimes are completed crimes at the time a taxpayer willfully files a return that is knowingly false. Subsequent correction will not expunge or mitigate the fraud. Notwithstanding this, the IRS is often willing to view a voluntary disclosure of defalcations in the reporting of taxes in a civil rather than a criminal context and impose the civil fraud penalty rather than initiate a criminal investigation.
Objective in Handling Tax Audits Involving Fraud
As there is no foolproof formula for eliminating a criminal investigation in the disclosure of prior fraud, so, too, there is no reliable suggestion that a taxpayer with a paper trail revealing a fraud scenario will get through a civil tax audit without the case turning into a criminal investigation. There are certain objectives in handling audits involving fraud, however, which may reduce the probability that a criminal tax investigation will ensue from evidence presented at an audit.
The primary objective for the attorney handling a civil tax audit in which it is known that fraud may be revealed is to avoid false or misleading statements or other conduct that could be construed as an illegal or unethical cover-up. Records used in the preparation of tax returns have no privilege in a tax audit. However, cooperation may not be an option. So, too, invoking the Fifth Amendment privilege or otherwise alerting the agent to the sensitive nature of the case is to be avoided. Above all, the criminal tax defense attorney must determine the depth of the waters in which he must travel, and plot his client's course before he takes the helm.
Criminal Tax Liability of Corporations
Corporate criminal liability is based upon the acts of agents performed within the scope of their corporate duties. In the case of small corporations under the control of a single stockholder or a few stockholders, a willful act may be imputed to an individual upon the theory that the corporation acted as the alter ego of the individual. In larger corporations, where proof of knowledge of the duty imposed by the tax law may be more difficult to attribute to one person, ignorance of such an obligation may become a complete defense. However, corporate fraud may have conferred a tax benefit upon individuals that is covered up. In such a case, individual criminal responsibility is the issue. In particular, corporate deductions and characterizations of transactions may have benefited the closely held corporate shareholder in such a way that a dividend is seen in law to have been distributed by the corporation even though no such distribution has been made. (See discussion in this site on constructive dividends).
The Department of Justice has, on occasion, become too aggressive in the prosecution of criminal tax wrongdoing by a corporation by threatening the corporation with indictment if it continues to pay the legal expenses of employees also under investigation in a criminal tax context.
The following references deal with this issue:
The Criminal Investigation Division of the IRS is responsible for all criminal tax investigations.
Once a case is received into the Criminal Investigation Division of the IRS (CID) a Special Agent is assigned to investigate the facts. Tax charges follow the path of the Special Agent’s review. It is, in fact, the job of the Special Agent to prove that a tax crime has been committed.
The Special Agent will write a report summarizing the evidence obtained during an investigation, including testimony of the taxpayer and the third parties, and will make a recommendation for referral to the Department of Justice, Tax Division for criminal prosecution if justified. See: IRS Statute.
Proof of a tax deficiency owing is a necessary element of a tax-evasion case.
Tax-evasion is the most serious charge in the hierarchy of tax crimes. In a false return prosecution, which is also a felony, a false return need only be presented to the IRS with an intention that its content be false in order to mislead the IRS.
The return need not result in a tax deficiency. A willful failure to file a tax return may be a crime in and of itself. It is often the case that willful failures to file are investigated in order to determine whether there was also a willful purpose to conceal an event, such as a large purchase, receipt, or other such indications of income that the taxpayer intended to hide by the deception of not filing a return at all.
During a criminal investigation, the taxpayer enjoys the usual rights of criminal suspects under the United States Constitution.
The Fifth Amendment privilege against self-incrimination and the Sixth Amendment right to have the assistance of counsel are of particular importance to the taxpayer in a criminal tax investigation. Taxpayers may shelter evidence from disclosure under the attorney-client privilege or attorney-work-product privilege where these privileges are properly applicable.
An accountant might be hired by Attorney Craft to prepare a forensic accounting analysis, or to assist in obtaining knowledge of a client’s affairs. This assistance is limited to information gathering and analysis to support the client's defense. An accountant’s analysis in this connection is protected by the attorney-client and work-product privileges.
Special methods of proof are available to Special Agents conducting criminal investigations.
The field of criminal tax involves proof in the same way that a normal criminal case involves proof. Proof in a criminal tax investigation is normally of the financial variety. Acts of deceit or concealment can be proven in ways other than through financial records, of course, but criminal tax investigations are, by and large, “paper-driven cases.”
The government prefers specific item proof whenever possible; that is, proof that “items” result in understatements of tax. In other words, particular sources of income, inflation of deductions and mischaracterization of transactions or events might be seen to have misled the IRS or to have fraudulently represented the nature or amount of income.
When using “indirect methods of proof,” the government will be required to show increases in bank deposits, net worth, or the presence of large cash expenditures not accounted for in the normal course of reported income. The fact that a taxpayer’s wealth grew over a period of years out of proportion to amounts reported on tax returns for those years presents an inference to a finder of fact that there has been unreported income. The three main indirect methods of proof used by the government are the net worth method, the expenditures method, and the bank deposits method of proof. Combinations of these methods may be used to prove fraud.
References to current federal tax prosecutions and tax scams.
Schedule a consultation: Contact Boston criminal tax investigation Lawyer Theodore L. Craft.