Chapter 6
Criminal Liability and Voluntary Tax Disclosure
If you know you have violated a tax law there’s still a number of things that can be done to help avoid or reduce the most serious penalties. It is important to discuss your options with an attorney at this stage because the best practice can be different for each individual case.
If your intentions were willful, deliberately done to defraud the IRS, e.g., “cooking the books,” of your business, reporting to be married when you’re single, claiming income from one job but neglecting to record income from your weekend gig for a few years – that type of tax evasion is much more serious than making an honest math mistake and will be weighted as such in court.
“Best Case” Scenario
It bears repeating, but since the U.S. Attorney has a 90 percent conviction rate with criminal tax cases, the odds are not exactly in your favor. It is important to understand what the goals are at the outset. The number one thing to be aware of is that most criminal tax charges can be mitigated.
Oftentimes, there is a pattern of criminal conduct – it is exactly that – a pattern. It occurs over multiple years, it occurs over multiple tax returns. The tax loss has to be enough to whet the appetite of the U.S. Attorney.
The IRS does not go after people for $5,000 or $10,000 dollars. They are looking for bigger cases because they are dealing with limited resources and they are looking to send a message.
At the very least, tax counsel can come in and try to mitigate the tax loss, mitigate and lessen the charges, penalties and possible sentencing. That happens at the U.S. Attorney level.
However, in a lot of cases — if you have the facts to support it — you can completely derail a criminal investigation. Criminal investigations have a very high bar. You have to prove beyond a reasonable doubt that someone did something. There are a lot of things that you can do to throw roadblocks into the system.
There are also a lot of things that you can do to work with the criminal agents and work with the U.S. attorneys to achieve a global resolution to the civil and criminal side of things.
For example, if you run a business and you are accused of committing tax fraud in that business, we can plead the business to criminal charges and reduce the criminal charges or eliminate them completely for the individual, coupled with payment of the tax.
There are a lot of reasonable goals. It depends on two things: number one – the facts of the case and, number two – the tax loss and how much culpability you really have.
Anything is possible but it is important that you are honest with yourself at the beginning. You must be honest about your conduct and candid with your attorney.
Your candid conversations with tax counsel are protected under attorney-client privilege. Once the facts are displayed, we can lay the cards on the table and call it what it is. From that point, we can build a strategy that works around reasonable expectations for the case.
At the very least, a reduction in criminal charges or elimination of them completely is a pretty good goal and I think it is one that is fairly achievable, depending on your circumstance.
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Voluntary Disclosure
There are technically two types of voluntary disclosure which may help with mitigating the damage, or in some cases, avoiding criminal liability altogether. Both the IRS and DOJ Tax have policies which offer some form of consideration for letting the government know of a tax violation.
IRS Voluntary Disclosure
Some cases may qualify for the IRS’ voluntary disclosure policy, which could help to avoid criminal liability altogether. Under the voluntary disclosure practice, a taxpayer who may have violated internal revenue laws can willingly let the IRS know of this non-compliance with some protection. See IRM 9.5.11.9.
The tax system relies heavily on the voluntary self-reporting of the public, and this policy is just another way for the government to encourage this compliance. However, this is a policy of the IRS and not the law, so it does not ensure immunity from prosecution.
Each case is different, and if you are considering making a voluntary disclosure, it is imperative you discuss this option with your attorney first. This practice is usually best suited in a situation where a taxpayer willfully files a false tax return and quickly wants to make amends before being contacted by the IRS.
If a timely and truthful disclosure is made, the taxpayer cooperates with the IRS to determine the actual amount of taxes due, makes a good faith effort to pay, the IRS may not refer the taxpayer for prosecution. See id.
Timing is important with a voluntary disclosure. While it is possible that you may still be able to disclose the violation if you are being civilly audited, if the government has already been made aware of the tax violations and/or you are reasonably certain you are being investigated criminally by the IRS, the disclosure would not be considered timely.
According to the IRS disclosure is timely before the IRS has: (1) Commenced a civil examination or criminal investigation; (2) Received information from a third party (e.g., informant, other governmental agency, John Doe summons, etc.) alerting [them] to your noncompliance; (3) Acquired information directly related to your specific noncompliance from a criminal enforcement action (e.g., search warrant, grand jury subpoena, etc.). See id. If a voluntary disclosure is made, CI will likely be involved from the outset.
A voluntary disclosure as contemplated by the IRS practice is different from what is known as a “quiet disclosure” which involves the filing of amended returns reporting the assets or property previously not reported or under reported. This is a risky practice, and one that is disfavored by the IRS.
DOJ Tax Voluntary Disclosure
The Tax Division ultimately decides whether or not to pursue prosecution for a tax case referred to them, and voluntary disclosure of a tax offense is one factor that the Tax DIvision will take into account in making this decision. See generally USAM, § 9-27.220, et. seq.
The DOJ Tax voluntary disclosure policy is in line with the IRS. If the defendant has complied with the IRS practice, the Tax Division “may consider” this in making its own decision to prosecute. See CTM § 4.01 [1]. However, there is no guarantee that the Tax Division will not prosecute an offense where the defendant complied with the IRS practice. See id.
Specifically, DOJ Tax looks into the timeliness of the disclosure and the cooperation of the taxpayer. See id. The Tax Division does not look at timeliness as an objective standard (i.e, if the disclosure occurred before or after an objective event) but rather a subjective case-specific approach. See id.
For example, if the taxpayer is already being audited, but is aware of something that the auditor would never find and discloses this fact anyway, the Tax Division may still consider this timely.
For cooperation, this generally requires that the taxpayer pay what is due to the government. However, if the taxpayer doesn’t have the ability to do this they must fully disclose their financial situation along with the violation. See id.
A voluntary disclosure may also be used in sentencing as a reason for downward departure from the sentencing guidelines. See USSG A75K.16.
Know Your Rights
If you are the subject of a civil audit, the case does not necessarily have to be turned over to CI. Even if you are already being investigated by CI, the IRS administrative investigation, while criminal in nature, does not need to be recommended to the Tax Division for prosecution.
Even if the IRS has referred the case to the Tax Division, the case must first be authorized by the Tax Division for prosecution. Each of these steps can weed out weak cases. Therefore, understanding your specific situation, knowing your rights and consulting with a lawyer early on can be greatly beneficial in mitigating the damage.
There are a number of rights and privileges afforded to defendants throughout the process. These can and should be used appropriately to avoid offering statements or evidence that may indicate criminal intent, display willfully misleading conduct, or could be used against the defendant in prosecution.
Oftentimes, a bad situation can be made worse by over-divulging or lying. The proper use of privileges and rights can avoid this situation.
Many people have already heard of the attorney-client privilege. The essence of this privilege is that information told in confidence to an attorney for the purposes of obtaining legal advice, does not have to be disclosed. Fed. R. Evid. 501; see Johnson v. Commissioner, 119 T.C. No. 27 (2002). This can be waived if the taxpayer also told this information to a third party. Fed. R. Evid. 502.
The work-product privilege is another applicable privilege in the tax world where information generated in “anticipation of litigation” does not need to be disclosed. See United States v. Foxworthy, 457 F.3d 590 (6th Cir. 2006).
For example, a document created to assist with the defense of a taxpayer’s case after they have been investigated by CI would be created in anticipation of litigation and may be privileged.
Marital privileges allow for the non-disclosure of information provided in the confidence of marriage, and there are two separate privileges within this category. In the marital communications privilege, either spouse can invoke the privilege in regard to communications that occur between them during the marriage. United States v. Ramirez, 145 F.3d 345, 355 (5th Cir. 1998); United States v. Chagra, 754 F.2d 1181, 1182 (5th Cir. 1985).
Even if the couple is no longer married, the privilege can still be invoked for communications that happened during the marriage. United States v. Entrekin, 624 F.2d 597, 598 (5th Cir. 1980).
On the other hand spousal immunity can only be invoked by the spouse who is not the defendant, and can’t be invoked after the marriage is over. Crawford v. United States, 541 U.S. 36 (2003). A partner who invokes spousal immunity can’t be forced to testify against the defendant partner.
The Fifth Amendment to the United States Constitution grants many important rights to individuals accused of a crime. Among these rights is the right against self incrimination, or the right to remain silent. There are many points within a criminal tax case where this right is abundantly important and the taxpayer needs to consider whether or not to exercise this right.
Stages at which it is possible to exercise this right are in answering certain questions on a tax form, during a civil or criminal investigation, while in custody of law enforcement, and at all court proceedings including trial.
Conferences with CI, DOJ Tax, and AUSA
Since there are many levels of review before the prosecution stage, and most tax crimes can’t be prosecuted by the USAO prior to Tax Division approval, the ability to conference can be a major benefit, and possibly even resolve a case altogether.
Prior to indictment there are two major times when a conference can and should be had. After the conclusion of the administrative investigation and prior to a Tax Division referral to the USAO.
IRS Conference
Once CI completes their administrative investigation and prepared a special agent report, the taxpayer will be afforded a conference with the special agent in charge (“SAC”), or designated assistant special agent in charge (“ASAC”), and the IRS’ criminal tax attorney as a matter of course unless the case is being handled by grand jury investigation. IRM 9.5.12.3.1
If the conference occurs, the SAC will determine where the conference is held. IRM 9.5.12.3.2. Defense counsel may appear at the conference on behalf of the taxpayer without the taxpayer present. IRM 9.5.12.3.4. However, the taxpayer can attend as well as CPAS, enrolled agents, or anyone who has important knowledge of the case.
If any of these parties is deemed disruptive, the SAC may end the conference or ask the disruptive party to leave. See id. The conference may also be recorded if the SAC requests. See id.
Before the conference occurs, the taxpayer will be read their Fifth Amendment Right to remain silent. See id. Counsel for the taxpayer will still be read these rights even if they are attending alone. See id. During the conference itself, the IRS will give the taxpayer and their attorney basic information about the case against them and the proposed charges, so that they have an understanding of why the IRS intends to refer them to prosecution. 26 CFR 601.107(b(2).
However, the information given will be very limited as the IRS Manual specifically requires. After the conference, the taxpayer will be told whether the case will or will not be referred to the Tax Division. IRM 9.5.12.3.5 .
Tax Division Conference
The Tax Division will generally grant a written request for a pre-indictment conference if the Government thinks it will be beneficial in assisting with the prosecution decision. See USAM 6-4.214.
However, there is no absolute right to this conference, and the Tax Division may deny the request. See id. According to the Tax Division, the official purpose of the conference is to provide “an opportunity to present any explanation or evidence which [the taxpayer] desires the Tax Division to consider.” See id.
The conference is not meant as a way for you to determine what evidence the government has against you. Generally the only information provided will be the proposed charges, the income and tax computations recommended by the IRS, and the tax years involved.
The taxpayer or counsel is permitted to present their explanations of what occurred or any evidence they want the Tax Division to consider in making their decision. See id. Plea negotiations may also be conducted during conferences in non-grand jury cases. See id. However, the plea has to be consistent with Tax Division policy and the policies of the USAO which would prosecute the case. See Tax Division Directive No. 86-58 (May 14, 1986), supplemented by Memorandum dated October 1, 2013, available at Criminal Tax Manual, Chapter 3.
Early pleas can be beneficial because the taxpayer will know the recommended sentence, and can generally negotiate for a lower sentence in exchange for the efficiency. While these conferences may sound only good at this point, it is important to note that the government can use information obtained at the conference in court proceedings. See Fed. R. Evid. 801(d)(2).
AUSA Conference
If the Tax Division has already sent the case to the USAO, the request will be denied. However, the taxpayer may also request a conference with the USAO. USAM 6-4.214. Like the Tax Division, the USAO gets to choose whether they want to grant or deny the conference. Each USAO is distinct, but the idea of the conferences is generally the same as with the Tax Division.
Immunity
In certain circumstances (generally relating to a larger scheme to defraud or where an individual representative of a company who has a lesser role in the offense is charged) the Government may decide that the taxpayer would be a more valuable witness than a defendant in line with their prosecution priorities.
In this instance if the taxpayer is willing to cooperate and testify on behalf of the Government, they could be offered immunity from prosecution. See USAM 9-23.000.
However, this isn’t a risk-free practice, even if the taxpayer is granted immunity in exchange for their cooperation, they could still be charged on conduct unrelated to their testimony in the immunized case, and the witness can’t refuse to testify under the Fifth Amendment right against self-incrimination.
Conclusion
I have said this before, but it bears repeating: because there are many levels of review before the prosecution stage, and most tax crimes can’t be prosecuted prior to Tax Division approval, the ability to conference can be a major benefit, and we could possibly even resolve your case altogether.
If you have serious tax problems, give me a call and let’s have a no frills, just-the-facts conversation. Depending on your scenario, I can help you find shelter from some if not most of the fallout before you get prosecuted.
