Reading this chapter will give you an overview of the criminal justice system and how it relates to violations of laws regarding the tax process. It will provide an initial layout of the roles of the agencies that are responsible for criminal tax enforcement in the United States and why criminal tax cases are charged.
Why Am I Being Charged with a Tax Crime and Who is Bringing These Charges?
Anyone who has allegedly violated the internal revenue laws can be charged with a tax crime. This includes civilian taxpayers, corporations, or professional tax preparers. As we noted in the introduction, very few criminal tax cases are brought all of the way to prosecution and even fewer are brought through trial, but those cases that are prosecuted are usually quite strong for the Government.
The Department of Justice Tax Division is chiefly responsible for enforcing laws on most tax related offenses. 28 C.F.R. § 0.70. The Tax Division is a specialized unit within the United States Department of Justice, which is given authority by Congress to investigate and prosecute tax crimes and other crimes relating to tax offenses. See Id. Essentially, the Tax Division is responsible for overseeing criminal proceedings relating to internal revenue laws, and must approve all criminal charges brought under these laws. USAM § 6-4.200. There are limited exceptions to this broad power, but if you find yourself charged with a tax-related crime, odds are that it is covered under the authority of the Department of Justice Tax Division. See 26 U.S.C. 7212(a); 26 U.S.C. 7212(b); 26 U.S.C. 7213; 26 U.S.C. 7208; 28 C.F.R. § 0.70.
The official mission of the Tax Division is to “enforce the nation's tax laws fully, fairly, and consistently, through both criminal and civil litigation, in order to promote voluntary compliance with the tax laws, maintain public confidence in the integrity of the tax system, and promote the sound development of the law.” United States Department of Justice, Tax Division, About The Division, Mission (October 22, 2020) https://www.justice.gov/tax/about-division.
This may seem to you like a lofty (and wordy) goal… and it is! There are only so many government resources available to to prosecute all crimes under the internal revenue laws. See Criminal Tax Manual § 1.01. Therefore, one of the significant purposes of the Tax Division is to deter the average taxpayer from violating tax laws. USAM § 6-4.010. This is done by properly and effectively prosecuting and punishing tax violators to promote respect for the laws in place, and ultimately…make taxpayers decide it is in their best interest to avoid cheating on their taxes. See Id.
So, what does this all mean for those individuals who are charged with a tax crime? The bottom line is: The Government takes these charges seriously. In fact, if you are charged with a tax crime, the chances of being found guilty are very high. See Internal Revenue Service, IRS: Criminal Investigation Annual Report, 12-13 (2019). The most recent conviction rate (the number of criminal cases brought divided by the number of convictions) reported by the IRS is a staggering 91.2%. Id.
While the Tax Division is one major players in the prosecution of a Tax Crime, the Tax Division works together with a number of different entities, who you will probably interact with more directly, in order to enforce internal revenue laws. These other entities include the Internal Revenue Service (“IRS”) (specifically IRS Criminal Investigation (“CI”), special agents, and attorneys with the IRS’s Office of Chief Counsel Criminal Tax Division (“CT”)), the Treasury Inspector General for Tax Administration (“TIGTA”), and Assistant United States Attorneys (“AUSA”). We’ll give you more details on these entities throughout this chapter.
The United States Attorney’s Office (“USAO”) is largely responsible for the prosecution (the conducting of legal proceedings in regard to criminal charges) of tax crimes, with oversight and advice from the Tax Division. Criminal Tax Manual § 1.01[b]. Many criminal tax cases are referred to the USAO from the Tax Division. However, if the USAO wants to initiate its own investigation into a possible criminal tax matter or to bring charges, it generally needs to seek approval from the Tax Division. § 1.02.
There are some instances in which the USAO does not need Tax Division Approval. If there is already an investigation of a non-tax matter pending, the USAO may “expand” that investigation to include allegations of tax crimes, as long as they first let the Tax Division know. § 1.03[b]. Even in this instance, the Tax Division still has to approve the charges. Id. There is also a limited category of cases, mostly false refund claims filed in the names of taxpayers who either don’t know or don’t exist, where the Tax Division has already given authority to the USAO to prosecute without going up the chain. See § 1.05.
Last, but most certainly not least important, is the IRS. The United States Attorney’s Office (“USAO”) is largely responsible for the prosecution (the conducting of legal proceedings in regard to criminal charges) of tax crimes, with oversight and advice from the Tax Division. Criminal Tax Manual § 1.01[b]. Many criminal tax cases are referred to the USAO from the Tax Division. However, if the USAO wants to initiate an investigation into a possible criminal tax matter or to bring charges, it generally needs to seek approval from the Tax Division. § 1.02.
There are some instances in which the USAO does not need Tax Division Approval. If there is already an investigation of a non-tax matter pending, the USAO may “expand” the grand jury investigation to include allegations of tax crimes, as long as they first let the Tax Division know. § 1.03[b]. Even in this instance, the Tax Division still has to approve the charges. Id. There is also a limited category of cases, mostly false refund claims filed in the names of taxpayers who either don’t know or don’t exist, where the Tax Division has already given authority to the USAO to prosecute without going up the chain. See § 1.05.
What if I am Under Investigation by the IRS Criminal Investigation Division and I Haven't Done Anything Wrong?
First, I want you to take a breath and think about the phrase, "I haven't done anything wrong.” “I haven't done anything wrong,” is a very absolute statement. If you are going to make that sort of that absolute statement, you need to be absolutely sure you have not done anything wrong.
The problem in a lot of these cases is that you have done something wrong. You may have not had criminal intent behind it, you may have not intended to defraud the government, but for some reason, your actions triggered an IRS criminal investigation.
If you did not trigger a criminal investigation, the agents would not be looking at you. There has to be some reason. Special agents do not just fall out of the sky. It is really important to assess your level of culpability and have an honest conversation about that in the beginning. With that said, special agents are by no means perfect and criminal cases are by no means 100 percent accurate.
What you usually deal with in criminal cases are levels of truth. You deal with things that are 100 percent true. You deal with things that are sort of true and then you deal with things that are absolutely not true.
The important thing is to understand that this is a strategic position that you are in and that your goal is to mitigate and minimize any impact that this criminal investigation is going to have.
It is not even about indictment, although many cases head towards the U.S. Attorney's Office and they do not spend time on you unless they are charging you. You do not get in their crosshairs by accident, but the important thing is that criminal investigations have a lot of detrimental impacts on people.
It is very important that you work to protect yourself in any way that you can. Even if you are completely innocent, retain criminal tax counsel and have a consultation with us.
At the very least, we can sit down and build a strategy so that at worst, you are completely prepared for something that never happens. Then you do not have to worry about it, but at best, you are in a great position to prevent some serious consequences going forward.
How Does the Criminal Tax Process Work? A Brief Summary
The typical criminal tax process begins with the IRS. This portion of the process is known as the IRS phase and we will discuss this phase in more detail in Chapter 2. The IRS may receive a tip from an informant, information of criminal activity from other federal agencies, look into suspicious activity on its own, or conduct a civil audit that turns bad. The civil audit that takes a turn for the worse, known as an “eggshell” audit, is a large feeder of criminal tax cases so we’ll start from there.
Civil audits can be triggered by random selection based on a computer database that compares tax returns to the “norm” for a similar return or from a relation to other taxpayers who showed issues on an audit. See, Internal Revenue Service, IRS Audits, https://www.irs.gov/businesses/small-businesses-self-employed/irs-audits. A real auditor will then review the random selections to determine if there are actually issues worth investigating. See id. If you are one of the unlucky few to be audited, an internal revenue agent will be examining and reviewing your accounts and returns to ensure that financial information is being correctly reported and that the taxpayer is complying with internal revenue laws. If at any point during the civil audit, the revenue agent has a “firm indication” of fraudulent activity, the agent will stop the civil audit and the criminal administrative investigation with the IRS will begin. See IRM 18.104.22.168 (1). During this time, you may not hear from the revenue agent, so a long silence during a civil audit is generally an indication that it will turn criminal.
This quasi-criminal phase is known as an administrative investigation. It is technically not a criminal proceeding, however you will have some of the same rights as it is criminal in nature. During an administrative investigation, a special agent for the IRS will pay a visit to the subject of the investigation, and utilize a number of different techniques to gather information and evidence in order to determine whether the case should be referred to the Department of Justice for prosecution. See 26 U.S.C § 7602. Prior to referral, the recommendation must go through many different layers of review.
If the case passes the test on each review, it will be sent to the Tax Division for approval. This is called the DOJ Tax Phase. In this phase, the Tax Division reviews the report of recommendation from the IRS as well as the facts of the case and determines if: (1) the case is ready for prosecution (2) the case requires further investigation by a grand jury or (3) if the case will be declined and kicked back to the IRS. See USAM § 6-4.200.
If the Tax Division determines the case is ready for prosecution, it will be sent over to the appropriate United States Attorney’s office to be handled by an Assistant United States Attorney. We have now entered the prosecution phase. The Tax Division may still assist the USAO if it is so requested. USAM § 6-4.219.Typically in a criminal Tax Case, the USAO will charge the defendant by a formal document known as an indictment. See Fed R. Crim P. 7(c)(1). The indictment will be presented to a jury of 16 to 23 individuals, called a grand jury, to determine whether there is sufficient evidence to charge the taxpayer with a tax crime. If the jury does decide there is enough evidence, they will return the indictment known as a true bill for signing and execution, and the taxpayer will be formally indicted. See United States Department of Justice, Justice 101, Charging, https://www.justice.gov/usao/justice-101/charging.
After indictment, you may be sent a date to appear in court or you may be arrested and taken into custody by a federal agent. If you are taken into custody you will be brought before a magistrate judge within a short period of time, who will determine if you can be released on bond and set the amount of bond as well as any restrictions on your release. See Fed. R. Crim P. 5(a)(1)(A). If released, you, or an attorney in your stead, will be required to be present at all future hearings.
The first formal court appearance, where you will stand in front of a judge and be read the charges against you is called an arraignment. At arraignment you will be advised of your rights and may also determine your financial ability to hire counsel. See Fed. R. Crim P. 10. The prosecutor may also provide an initial offer at arraignment. In some cases, you may choose to plead guilty at arraignment. It should be noted that at multiple points throughout this process, and even before indictment in some rare cases, plea negotiations can take place. However, for the sake of drawing you this verbal roadmap of a criminal tax life cycle, we will assume that no plea is taken and you choose to proceed to trial. However, if a plea is accepted, you will be asked a series of questions by the judge called a plea colloquy to ensure that the plea is in the best interests of justice. Fed. R. Crim P. 11(b). Once the colloquy is complete and the plea is accepted by the presiding judge, you will advance to the sentencing phase. With a negotiated plea, the AUSA will recommend a specific sentence to the sentencing judge.
After the arraignment, during the pre-trial period a number of important events can take place. First is discovery. Through discovery you can formally request documents and evidence in the Government’s possession, and have an opportunity to see all of the evidence that the Government has against you. See ed. R. Crim P 16. During this time any motions, including those to dismiss the charges or keep out improperly obtained evidence can be made. See Fed. R. Crim P. 12(b). Additionally, a pre-trial conference between your lawyer, the AUSA, and the court can take place to discuss unresolved issues and allow further opportunities to negotiate a plea. Fed. R. Crim P. 17.1.
If the case proceeds to trial, you will attend with your lawyer and sit at a large desk on one side of the courtroom. If at trial you are still in custody, you will be permitted to wear plain clothes to sit in front of the jury. Estelle v. Williams, 425 U.S. 501 (1976). While it is important to be present for the entirety of the trial, including the selection of the jury you will not be required to take the stand and testify. Prior to the trial both defense counsel and the Government will have the opportunity to question a group of potential jurors and select those six or twelve to sit on the case. See Fed. R. Evid. 47. Any motions in limine- a motion to exclude testimony from trial- will be conducted prior to the trial and outside of the presence of the jury. Luce v. United States, 469 U.S. 38, 41 n.4 (1984). Once these motions have concluded the case will proceed to trial. Here both sides will have the opportunity to call witness to the stand to testify and present evidence to the jury. The lawyers will be permitted to make opening and closing statements, but these statements are not law or evidence. They are simply to guide the jury on interpreting the law read by the court. Once the trial has concluded, the court will read the jury instructions on the applicable law, and allow the jurors to leave to make their decision. If the jurors come to a unanimous decision on the guilt or innocence of the defendant, this is called reaching a verdict. Fed. R. Crim P. 31(a). The jurors will then present their verdict in open court to the defendant, lawyers, and judge.See id.
If the defendant is found guilty, the judge will proceed to the sentencing phase. At this point a date is set for a sentencing hearing. Before this date, the probation office will ask you a series of questions called a presentence investigation to aid in the court’s decision. See Fed. R. Crim P. 32(c); 18 U.S.C. § 3552. At the sentencing hearing both sides will get a chance to argue their case for what the sentence should be and any victims of the offense may be afforded the opportunity to speak. Fed R. Crim. P (i). You will also be advised of your right to appeal the final judgment and sentence. Once the judge pronounces their sentence, it will be recorded as a final judgment. If you are sentenced to prison, you will likely be remanded (taken into custody) at that time, or in some rare cases given a certain date to report for your prison sentence.