Criminal Tax Investigations
| Publication year | 1983 |
| Pages | 438 |
| Citation | Vol. 12 No. 3 Pg. 438 |
1983, March, Pg. 438. Criminal Tax Investigations
This article intends to introduce the general practitioner and the tax generalist to criminal tax practice. The repercussions of tax criminal investigations are unique. The following list presents the most crucial by-products of an adverse disposition of a criminal tax case.
1. Criminal Penalties: The maximum penalties for the major tax felonies(fn1) have been increased to five years per count plus not more than $100,000 per count ($500,000 per count for an incorporated defendant). For the major tax misdemeanors,(fn2) the maximum penalty is one year per count together with either a fine of $25,000 per count or $10,000 per count, depending on the statute. The maximum penalty is similarly increased to $100,000 per count or $50,000 per count should the defendant be incorporated.
2. Loss of Livelihood: A criminal conviction can destroy an individual's ability to earn a living; acquittal may still leave a cloud on his reputation. A broad range of state and local statutes and ordinances jeopardize the continued occupation of certain individuals who have criminal tax convictions. The following occupational list is not all-inclusive, but gives an idea of the broad ramifications: attorneys,(fn3) certified public accountants, physicians, dentists, optometrists, securities dealers and salesmen, real estate brokers, barbers and cosmetologists and hearing aid dealers.(fn4) Circular 230,(fn5) promulgated by the Internal Revenue Service ("IRS") precludes anyone with such a conviction from practicing before the IRS.
3. Acquittal No Bar:(fn6) Immediately after the defendant is found not guilty of all counts by a jury, the IRS will commence the civil disposition of the case.
4. Collateral Estoppel if Conviction:(fn7) On the other hand, if the client is convicted of tax evasion, the client will be precluded from even contesting the matter of tax fraud in the subsequent civil disposition.
5. Greater Civil Deficiencies:(fn8) The amount of the asserted civil deficiencies will be substantially greater than the deficiencies which were the subject of the criminal investigation. The Special Agent's report will not mention mere technical adjustments which do not relate to the hard criminal fraud issues. Those technical adjustments will be a part of the civil revenue agent's report.
6. More Years in Civil Case:(fn9) It is likely that the IRS will argue in the subsequent civil disposition that the same fraudulent type of activity existed both before and after the criminal years. Accordingly, deficiencies will be asserted not only for the years involved in the criminal investigation, but also years before and after the years involved in the criminal case.
7. Civil Fraud Penalty: There will definitely be the assertion of the civil fraud penalty if there was a criminal conviction; there will probably be an assertion of that same penalty if there was an acquittal. The civil fraud penalty is 50 percent of the entire deficiency and is not limited to that portion of the deficiency due to the wrongful activity.(fn10) Further, if the return was filed even one day late, the computation of the civil fraud penalty will completely ignore all taxes paid by withholding or timely estimates.(fn11) The civil fraud penalty is non-deductible and is therefore paid with after-tax dollars. The Colorado civil fraud penalty is the greater of $50 or 100 percent of the deficiency.(fn12)
8. Interest: Interest will be computed on the entire deficiency from the due date of the return.(fn13) Tax fraud investigations typically take from two to three years and, by the time the screening processes have been completed, an additional year or so may have lapsed. It is not unusual for more than six or seven years to have transpired from the due date of most of the returns to the time that a civil case is ready for civil disposition. Interest rates have varied(fn14) from 12 percent per annum from February 1, 1980, to February 1, 1982, and then 20 percent per annum to January 1, 1983; then it will drop to 16 percent per annum, but it will be compounded daily, with the rate changing every six months.(fn15) If the interest rate would remain at 16 percent compounded daily for every dollar of deficiency tax claimed, the taxpayer will owe $1.61 of interest after six years.
There is a new kicker to the interest provision which provides that in addition to the normal interest previously discussed, the taxpayer will also have to pay an amount equal to 50 percent of that portion of the interest attributable to fraud.(fn16) This additional 50 percent of the interest will not be deductible.
9. No Statute of Limitations:(fn17) If the client pleads guilty or is found guilty of a tax felony, the doctrine of collateral estoppel conclusively establishes that the client did participate in tax fraud for civil purposes. Accordingly, there will be no statute of limitations regarding those years. If the client was acquitted of tax fraud or if the criminal case was dropped for any reason whatsoever, it is likely that the IRS will continue to urge that some part of the deficiency was due to fraud and, if sustained, no statute of limitations will apply. If the IRS is successful in convincing a finder of fact that the same pattern of fraud existed in years before the criminal years or years after the criminal years. again, no statute of limitations will apply to those ancillary years.
10. Preparation and Promotion Penalties: If the client is an attorney, an accountant or anyone involved in the preparation or promotion of fraudulent income tax returns or returns or statements which are part of the abusive tax shelter promotions, then that client will probably also have to answer to the $100 negligence penalty, $500 willfulness penalty, greater of $1,000 or 10 percent of gross income to be derived by the promoter, $1,000 per individual document or $10,000 per corporate document penalties.(fn18) In addition, the client may be faced with either or both the income tax return preparer injunction suit or the injunction suit directed against promoters of abusive tax shelters.(fn19)
11. No Bankruptcy Rehabilitation: Just for good measure, the law...
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