The IRS Phase
A criminal tax case generally begins with the IRS. The IRS has its own criminal investigation (“CI”) branch, dedicated to investigating taxpayers suspected of violating the internal revenue laws.
Within the CI branch are special agents who are responsible for conducting these investigations. CI Special Agents are considered law enforcement officers, and they have many of the same powers as traditional law enforcement officers, such as the ability to make arrests and carry firearms. See IRM 22.214.171.124.1 Authority To Carry Firearms (11-10-2004).
CI Special Agents can conduct their investigations without the assistance of other outside law enforcement. However, they may work together with other entities within the IRS such as revenue agents, IRS attorneys, and Fraud Technical Advisors (“FTA”).
Revenue agents are civil accountants employed within the IRS to ensure compliance with tax codes by examining and auditing tax returns and records. If you are going through a civil audit by the IRS, these are generally the individuals who will be conducting your audit.
They are often a large source of referrals to CI. IRS Attorneys work as a form of “in-house” counsel and provide legal assistance to CI Special Agents.
You probably won’t have much contact with the IRS Attorneys, but they become especially involved if the CI Special Agent wishes to enforce a summons or seek a search warrant during an investigation.
FTAs are a type of specialized consultant with the IRS, and their main job is to look specifically at any indications of fraud to determine whether a referral to CI for a criminal tax administrative investigation is appropriate.
DOJ Tax Approval Phase
The approval phase begins when a case is referred to the Criminal Enforcement Section (“CES”) of the Department of Justice Tax Division for authorization.
In most tax cases, the Tax Division’s approval of a case is necessary before prosecution. CES has different offices for different geographic locations. CTM 1.04[b].The DOJ Tax CES organization chart is at CTM 1.13. Therefore, which CES office that reviews the referral is going to depend on where the tax crime took place. See id.
Since the Government only has so many resources available to prosecute these crimes, it is important that CES carefully selects those cases which have the greatest conviction potential, highest quality of referral from IRS, and align with its priorities to refer to grand jury investigation or USAO prosecution. See generally USAM 6-4.010. The idea behind this is the tax division brings fewer charges with better results so that the average taxpayer is deterred. See id.
Most recently, the Tax Division’s major litigation priorities include corporate and healthcare fraud, offshore tax evasion, stolen identity refund fraud, and employment tax crimes. See generally, Department of Justice Tax Division, FY2019, Congressional Budget.
The Grand Jury
A federal grand jury is made up of 16 to 23 citizens who are tasked with determining whether or not there is probable cause to charge a defendant with the crime presented. See Fed. R. Crim P. (6)(a)(1). A grand jury can only be used to gather evidence before a defendant has been indicted. Costello v. United States, 350 U.S. 359, 362 (1956).
The grand jury does not decide whether the defendant is innocent or guilty of a crime. Therefore, their principal function is investigation. The Grand Jury phase doesn’t fit squarely into the criminal tax case roadmap. It can be initiated in a few different ways and doesn’t always, although in most criminal tax cases it will occur.
The most common way a grand jury investigation is initiated in a tax crime is through Tax Division referral to the U.S. Attorney’s Office. JM 6-4.200. The USAO is authorized to conduct grand jury investigations into tax crimes that the Tax Division has already referred to the USAO for prosecution. See CTM 3.00.
The USAO is also authorized to conduct a grand jury investigation into a tax crime with the tax division’s prior permission, or if the Tax Division believes further investigation is required to decide if a case should be prosecuted. See id.
The USAO can initiate a grand jury investigation into a Tax Crime without a Tax Division referral in limited circumstances. For example, the USAO can expand a non-tax investigation in order to include tax related offenses. See id. at 9.
However, in these cases, the Tax Division has to authorize the specific tax charges before the USAO files an information or seeks the return of an indictment. See Tax Division Directive No. 86-59 (October 1, 1986), available in Criminal Tax Manual, Chapter 3.
The IRS can also initiate a grand jury investigation in some instances. If CI for some reason is unable to either finish its investigation, decides further investigation is needed, or determines that it is unable to use its administrative investigation to properly gather evidence, it can request that the Tax Division authorize a grand jury to investigate the suspected tax offense. JM 6-4.121.
There are also limited cases in which CI is allowed to refer a case directly to the USAO for prosecution and grand jury investigation. See JM 6-4.243. In the event that the IRS requests a grand jury investigation, this will be considered a referral to the justice department.
Once a criminal referral is made, the IRS can no longer use their administrative summons powers. See 26 U.S.C. § 7602(d).
Why would the IRS want to turn their investigation over to a grand jury? The grand jury is a powerful tool for a couple of reasons. First, the grand jury has subpoena power. See JM 9-11.000. This means they can legally compel a person to come before them and testify or produce documents.
You can’t just ignore a subpoena. A failure to comply with a subpoena could cause serious legal consequences. Unlike an administrative summons used by the IRS, the taxpayer will not be notified of a subpoena, and the requirement to return documents or appear to testify can be on very short notice.
Grand juries are not subject to evidentiary rules, meaning they can consider all types of evidence, even evidence that may not be allowed at trial. JM 9-11.232. Finally, the grand jury allows a prosecutor to test out their case prior to trial.
Unlike an administrative investigation, while you may have a lawyer assist you through the grand jury phase, no other lawyers are allowed in the grand jury room. Fed. R. Crim P. 6(d). The prosecutor, testifying witness, and a court reporter are the only individuals who are permitted to be in the grand jury room. Id.
The Prosecution Phase
If the Tax Division approves a case for prosecution, it will typically be sent to the appropriate United States Attorney’s Office to be handled by an Assistant United States Attorney.
The United States Attorney’s Office that receives the case isn’t selected at random. When the Government charges a crime, they have to show that the trial for this crime will occur in the right place. This place is called a venue.
Under the Constitution, the proper venue is the place where the crime was committed. U.S. Const. art. II, § 2, cl. 3; U.S. Const. amend. VI. This applies to a federal criminal tax case unless there is a statute or rule that says otherwise. Fed. R. Crim. P. 18.
In the federal criminal system, trials are heard in one of the 94 federal judicial districts throughout the United States. See United States Department of Justice, Justice 101, Charging.
Each state has at least one district, and many states have multiple districts, which each contain a district court. See id. The exact location within the judicial district is decided by convenience to the defendant and witnesses. See id. When we discuss each of the major tax crimes below, we will also discuss any special rules relating to the venue.
The Government only has to show that the venue is proper “by a preponderance of the evidence”. United States v. Maldonado-Rivera, 922 F.2d 934, 968 (2d Cir. 1990), cert. denied, 501 U.S. 1210 (1991); United States v. Griley, 814 F.2d 967, 973 (4th Cir. 1987). A preponderance of the evidence is the legal way of saying that it is more likely than not. If you had to put a number to that concept it would look something like 50.000000001 percent.
How Are Tax Crimes Charged?
After a case is received by the Tax Division or USAO, the Government looks at all of the information provided as well as any recommendations by the IRS, and decides what crime can be proven from the facts of the case. The prosecutor is instructed to initially charge the most serious crime that can be proven. JM 9- 27.300.
The formal document the Government uses to charge the crime will either be an indictment or an information. In most federal tax crimes, the Government will use an indictment to charge the crime.
The indictment is a formal written accusation containing the charges against the defendant and the facts supporting them. Fed R. Crim P. 7(c)(1). The indictment is presented to the grand jury by the Government.
If the grand jury decides there is sufficient evidence to indict the defendant (only 12 of 16 are needed to indict), they will return the indictment known as a “True Bill” and present it to be signed and filed with court, United States Department of Justice, Justice 101, Charging.
When the indictment is returned, a warrant for the defendant’s arrest may be issued, and the defendant may be arrested. However, an arrest warrant does not absolutely need to be issued.
The court may instead issue a document called a summons, legally requiring the defendant’s appearance in court. See Fed. R. Crim P. 9. Prior to the indictment there will be a chance for discussions with the AUSA at which point, the Government can agree to request a summons rather than an arrest warrant.
The decision to do this is fact specific and depends on the individual AUSA handling the case. However, in criminal tax cases, an arrest may be the preferred means to deter others from committing a violation of tax laws. See Lauro v. Charles, 219 F.3d 202, 212 n.7 (2d Cir. 2000).
An information is also a formal written accusation, but instead of going through the grand jury process, it is filed with the court under oath. Fed. R. Crim P. 7(b). An information may only be used in federal misdemeanor cases unless the defendant specifically agrees to be charged by information. See id.
Are You Facing Prosecution for Tax Crimes?
The IRS website actually does define paying one’s taxes as voluntary. They “refer to our system of allowing taxpayers initially to determine the correct amount of tax and complete the appropriate returns, rather than have the government determine tax for them from the outset.”
Would you be more likely to pay your taxes if it was required and the Government determined the set amount and when you should pay? Some people have also tried to argue that “the Sixteenth Amendment to the United States Constitution did not authorize a tax on wages and salaries, but only on gain or profit.” That would be nice... but only for a select group of individuals and businesses.
Whether you’ve chosen to disregard paying your taxes for what the IRS terms “frivolous reasons,” or for reasons entirely your own and now are in some legal trouble and in need of a tax attorney, give my office a call and we’ll discuss your situation.