Evidence handed to the IRS criminal division on a "civil" platter: constitutional infringements on taxpayers.

• Author: Cochran, Amanda A.

INTRODUCTION

Fear of being audited by the Internal Revenue Service (IRS) pervades the lives of American taxpayers. (1) Taxpayers anxiously fear that the IRS may discover some evidence of taxpayer mis-reporting, and seek retribution. But while the threat of a hefty monetary penalty in conjunction with a routine civil tax audit may devastate a tax-avoiding citizen, the peril of criminal punishment imposes draconian consequences by comparison. (2) Accordingly, taxpayers, if audited, may justifiably fear that the true purpose of an IRS investigation is to garner evidence to support a criminal prosecution. Often, this fear is realized. (3) Although an IRS examination may commence as a civil audit, IRS agents frequently use information garnered during a civil investigation to instigate criminal proceedings against unsuspecting citizens. (4)

The IRS divides the responsibility of enforcing the nation's tax laws between its civil and criminal divisions. (5) During a typical civil tax investigation, an IRS agent's primary responsibility is to determine the correctness of a tax return as filed. (6) In comparison, the IRS agent's main objective during a criminal tax investigation is to determine whether the taxpayer has engaged in fraudulent tax reporting. (7) Interestingly, the most frequent catalyst of a criminal investigation is the civil audit itself. (8) However, the juncture where a civil examination turns criminal is not always clear. (9)

Because the American legal system invokes strict constitutional safeguards to protect individuals subject to criminal investigations, (10) it is critical that IRS regulations prohibit civil agents from circumventing these safeguards by using the civil audit to garner evidence for a criminal prosecution. The situation that most taxpayers fear is that they will permit an IRS agent to examine their private books and records during the course of a routine audit, and the agent will subsequently use this information for criminal prosecution. Accordingly, the IRS has explicitly enacted regulations that prohibit an IRS agent from developing a criminal case against a taxpayer under the guise of a civil investigation. (11) If the agent uncovers evidence of criminal wrongdoing during the course of a civil audit, the agent must then refer the case to the criminal division for prosecution. (12) Nonetheless, the stark reality is that revenue agents often gather the same evidence as their criminal division counterparts and effectively offer this evidence to the criminal division on a silver platter. (13)

These transgressions severely threaten the American voluntary tax reporting system. (14) The present revenue collection system centers on the self-reporting and voluntary compliance of taxpayers. (15) However, if taxpayers are uncertain as to whether tax investigations are criminal or civil in nature, they will not submit to routine tax examinations and the system of voluntary compliance will collapse. (16) While the IRS properly requests permission to examine books and records of taxpayers to collect tax revenue, use of such information to secure evidence for criminal prosecution poses a danger to the entire system. (17)

What is worse, taxpayers frequently have little recourse against agent misconduct based on the current state of the law. (18) Legislation fails to specify a remedy for violations of taxpayers' constitutional rights, (19) although these infringements clearly violate IRS regulations. Furthermore, judicial action insufficiently redresses these wrongs. Courts defer tremendous judgment to the individual IRS agents, and generally do not enforce vulnerable taxpayers' rights against the IRS. (20)

This Comment proposes that when the IRS fails to conduct a criminal investigation in accordance with its own internal regulations, the IRS violates a taxpayer's constitutional rights. This Comment has five parts. Section I discusses the silent transition of an IRS civil audit to a criminal investigation, and the regulations set forth in the Internal Revenue Manual (IRM) that forbid the IRS from conducting a criminal investigation under the guise of a civil audit. Section II argues that the IRM confers legal rights on taxpayers, at the very least, where such provisions safeguard a taxpayer's constitutional rights. Section III argues that the IRM provision that forbids an IRS agent from conducting a criminal investigation under the guise of a civil audit safeguards a taxpayer's Fourth and Fifth Amendment rights, and thus confers substantive rights on a taxpayer such that the taxpayer can challenge violations of the Manual. Section IV contends that regardless of IRS regulations, taxpayers bear a heavy burden in demonstrating that the IRS has violated its Manual because the tests employed by the courts favor the IRS. Finally, Section V concludes that the attention of Congress and the Supreme Court is imperative to declare that IRS regulations have the effect of law, and to provide for a clearer indication of when the IRS violates its own rules. Furthermore, attention of the IRS is necessary to enforce adherence to its own regulations.

1. DUAL CIVIL AND CRIMINAL DIVISIONS OF THE IRS

   The Internal Revenue Service (IRS) (21) divides the responsibility for enforcing the nation's tax laws between two investigative divisions: the civil Examination Division and the Criminal Investigation Division (CID). (22) This section provides an overview of these two divisions, describes the processes by which the IRS conducts investigations of taxpayers, and concludes by describing the interaction between these two divisions and the typical scenario where a civil audit evolves into a criminal investigation.

   1. DUAL FUNCTIONS OF THE EXAMINATION DIVISION AND THE CRIMINAL INVESTIGATION DIVISION (CID)

      The Examination Division and the CID represent two distinct vehicles for an IRS investigation of a taxpayer. (23) The Examination Division is the civil arm of the government's tax collecting scheme that is responsible for conducting routine civil tax audits. (24) An Examination Division investigator, known as a "revenue agent," is assigned a tax return to investigate whether the taxpayer has reported the correct income and tax. (25) The revenue agent performs numerical calculations, undertakes complex matching programs, and, if necessary, selects the taxpayer for a face-to-face audit. (26) In the last scenario, the revenue agent conducts a field examination to determine the correct tax and penalties, and claims for refund or credit. (27)

      A revenue agent begins a typical field examination by telephoning the taxpayer, and informing the taxpayer that he or she is under internal investigation. (28) The revenue agent enjoys the broad authority to compel production of information that may be relevant or material to the examination of a return. (29) If the taxpayer fails or refuses to furnish the agent with the information requested, the agent may serve a summons to the taxpayer, ordering the taxpayer or the taxpayer's record keeper to produce the requested information. (30) The revenue agent then examines the taxpayer's records, customarily on the taxpayer's premises, (31) and determines if the taxpayer has paid the correct income tax. (32) Revenue agents do not carry firearms, nor are they required to provide taxpayers with a Miranda-like warning." If the revenue agent discovers discrepancies as a result of various examination procedures, the agent dispatches a notice, (34) which includes the tax amount assessed and usually a civil penalty including interest. (35)

      Although an Examination Division audit typically concludes with a civil pecuniary settlement between the IRS and the taxpayer, (36) the audit may unearth evidence that causes the revenue agent to refer the case to its criminal division counterpart for investigation. (37) Specifically, if a revenue agent uncovers a "firm indication of fraud" during the civil audit--that is, if the revenue agent suspects that the taxpayer knowingly violated the tax laws (38)--the agent must immediately suspend the civil audit and refer the case to the CID via a fraud referral report. (39) IRS criminal referrals may be brought under specific tax violations such as the knowing failure to file a return or the knowing filing of a fraudulent return, (40) and increasingly involve money laundering schemes, and drug or currency violations. (41) The CID then accepts the case and concentrates on possible criminal prosecution. (42)

      The CID is primarily responsible for the investigation of alleged criminal violations under the Internal Revenue Code, and related federal statutes, including Title 18 of the United States Code. (43) Criminal tax investigations serve two purposes: to ensure public confidence by enforcing criminal tax statutes and to foster voluntary compliance. (44) Administratively, the IRS "uses the threat of criminal sanctions, fines, and imprisonment to deter noncompliance with the tax laws." (45)

      The CID receives information about potential tax evaders from many sources inside and outside the IRS. (46) For example, cases may originate from information received by a civilian informant, (47) a federal or state non-tax law enforcement agency, or a foreign country cooperating with law enforcement authorities. (48) Cases may also originate from information-gathering and other projects begun by special agents at the regional or district level. (49) Undoubtedly, however, the most important source for criminal prosecution is referral from other IRS divisions. (50) In many cases, a routine civil audit of a taxpayer's return, performed by the Examination Division, is the catalyst of a criminal investigation. (51)

   2. INTERNAL PROCESS OF THE CID

      In the usual non-tax criminal case, the government has knowledge of the alleged crime, and seeks to identify the perpetrator. (52) In tax cases, however, the government knows the identity of the alleged perpetrator and seeks to amass...