Tax violations.

• Author: Leneis, Brad
• Position: Twenty-Seventh Annual Survey of White Collar Crime

1. INTRODUCTION II. CRIMINAL INVESTIGATIONS UNDER I.R.C. [section][section] 7201, 7202, 7203, 7206, AND 7212(A) A. Policies and Procedures of IRS Investigations 1. Purposes of IRS Investigations. 2. Policies 3. Constitutional Considerations a. Notice and Due Process Requirements b. Substantive Rights and IRS Internal Regulations c. Disclosure of Documents 4. Statute of Limitations B. I.R.C. [section] 7201 1. Elements a. Existence of a Tax Deficiency b. Affirmative Act Constituting Evasion c. Willfulness 2. Defenses a. Lack of Deficiency b. Lack of Willfulness c. Third Party Liability/Reliance d. Selective Prosecution 3. Relation to Other Tax Crimes C. I.R.C.[section]7202 1. Willful Failure to Collect Tax 2. Willful Failure to Account For and Pay Over Tax 3. Elements a. Duty to Collect and/or Account For and Pay Over Tax i. The Statutory Duty ii. The Responsible Person b. Willfulness 4. Defenses D. I.R.C. [section] 7203 1. Elements a. Requirement to File a Return b. Failure to File a Return c. Willfulness 2. Defenses E. I.R.C.[section]7206 1. I.R.C. [section] 7206(1) a. Elements i. Signing a False Return or Document ii. Penalty of Perjury iii. Material Falsity iv. Willfulness b. Defenses 2. I.R.C. [section] 7206(2) a. Elements i. Aiding and Assisting ii. Material Falsity iii. Willfulness b. Defenses F. I.R.C. [section] 7212(a) 1. Elements a. Corruption, Force, or Threat of Force b. Endeavor to Obstruct the Administration of the IRS 2. Defenses G. Sanctions Under the U.S. Sentencing Guidelines 1. Violations of I.R.C. [section] 7201 2. Violations of I.R.C. [section] 7202 3. Violations of I.R.C. [section] 7203 4. Violations of I.R.C. [section] 7206 5. Violations of I.R.C. [section] 7212(a) III. CRIMINAL CONSPIRACY INVESTIGATIONS UNDER 18 U.S.C. [section] 371. A. Elements B. Defenses C. Statute of Limitations I. INTRODUCTION

   This Article outlines the elements, defenses, and sentencing consequences of selected criminal tax violations under the United States Internal Revenue Code ("I.R.C.") [section][section] 7201, 7202, 7203, 7206, and 7212(a).

   Section II of this Article examines the policies and procedures of Internal Revenue Service ("IRS") investigations. Section II also addresses the basic elements of, defenses to, and applicable statutory punishments for five principal tax crimes: tax evasion under [section] 7201, failure to collect tax under [section] 7202, willful failure to file taxes under [section] 7203, "tax perjury" and "aiding and assisting" tax fraud under [section] 7206, and interference with the administration of internal revenue laws under [section] 7212(a).

   Section III of this Article details criminal investigations of conspiracy to violate the tax laws under the defraud clause of 18 U.S.C. [section] 371.

2. CRIMINAL INVESTIGATIONS UNDER I.R.C. [section][section] 7201, 7202, 7203, 7206, AND 7212(A)

   Part A of this Section examines the policies and procedures of IRS criminal investigations, constitutional considerations, and the statute of limitations for I.R.C. violations. Parts B through F of this Section address the elements of and defenses to each of the following offenses: tax evasion, failure to collect tax, failure to file taxes, "tax perjury" and "aiding and assisting" tax fraud, and interference with the administration of internal revenue laws. Part G explains the applicable punishments set forth in the United States Sentencing Guidelines and various possible sentencing enhancements.

   1. Policies and Procedures of IRS Investigations

      1. Purposes of IRS Investigations

         IRS agents in the Office of Criminal Investigation (CI) investigate potential criminal violations of U.S. tax laws. (1) According to the Internal Revenue Manual, the mission of CI is to foster confidence in the tax system and to encourage compliance with the law. (2)

         In order to maximize deterrence of tax violations, CI focuses on individual participation in sophisticated criminal schemes, as well as high-dollar financial transactions. (3) The IRS is also more likely to audit a prominent taxpayer than a relatively obscure person. (4) Furthermore, the IRS audits a much higher percentage of high-net worth individuals than those with lower incomes. (5)

      2. Policies

         CI special agents are responsible for investigating possible criminal violations of the I.R.C. and related provisions of Title 18 of the United States Code. (6) Investigations begin in two ways: either as a general investigation ("GI") regarding "alleged non-compliance within a specific category of individuals;" or as a primary investigation ("PI") into an allegation that an identified "individual or entity is in noncompliance." (7) A GI may lead to a PI if the GI identifies an individual or entity requiring "further evaluation for potential criminal activity." (8) If the PI indicates that "prosecution potential exists," CI initiates a subject criminal investigation ("SCI"). (9) A PI and an SCI may be initiated simultaneously if appropriate. (10)

         When CI completes an investigation, it may refer the case to the U.S. Department of Justice ("DOJ") with a recommendation either to institute criminal proceedings or to further investigate through a grand jury. (11) Referral of a matter to the DOJ terminates the authority of the CI office to employ the administrative investigation process. (12)

         The DOJ's Tax Division generally authorizes prosecution in criminal tax cases, (13) and also supports and coordinates tax litigation. (14) U.S. Attorneys may assume responsibility for litigating criminal tax cases. (15)

      3. Constitutional Considerations

         a. Notice and Due Process Requirements

         Upon initial contact with the taxpayer who is an actual or potential subject of an investigation, IRS guidelines mandate that special agents identify themselves and advise the taxpayer of the pending criminal investigation. (16) However, a Miranda warning or the equivalent may not be constitutionally required, particularly if the contact occurs in a non-custodial setting. (17)

         b. Substantive Rights and IRS Internal Regulations

         An agent's failure to follow internal procedures may provide evidence that a taxpayer's constitutional fights were violated. (18) For example, IRS regulations direct examiners and revenue officers outside of CI to suspend examination or collection activity if it appears that the taxpayer's actions meet the criteria for a criminal investigation. (19) The use of information gathered during such continued investigation in a subsequent criminal proceeding may violate the taxpayer's Fourth Amendment protection against unreasonable search and seizure and Fifth Amendment protection against self-incrimination. (20) The burden is on the taxpayer, however, to show that: (i) the tax auditor "affirmatively misled [the taxpayer] as to the true nature of [the] investigation," and (ii) the misleading conduct "was a material factor in [the taxpayer's] decision to give information to the agents." (21) Courts usually defer to the judgment of a revenue agent in determining whether the investigation should be turned over to CI, (22) creating difficulties for taxpayers seeking to establish a constitutional violation. (23)

         Moreover, evidence obtained in violation of IRS regulations is not per se inadmissible. (24) The Supreme Court has reasoned that a rigid exclusionary rule would deter the creation of regulations that protect taxpayers. (25) When weighing admissibility, courts generally consider whether a guideline violation demonstrates bad faith on the part of the IRS. (26)

         c. Disclosure of Documents

         A taxpayer's disclosure of documents to the IRS may implicate constitutional protections under the Fourth and Fifth Amendments.

         Although the Fifth Amendment protection against compelled testimony may be invoked in any proceeding, (27) it does not shield from discovery the contents of voluntarily prepared tax records merely because those records contain incriminating information. (28) However, the "act of produc[ing]" documents may involve the requisite "compelled testimonial aspect" when the act itself represents a potentially incriminating communication about the existence, possession, or authenticity of the documents. (29) If so, the taxpayer may successfully invoke the Fifth Amendment privilege against self-incrimination. (30) The applicability of the privilege is determined on a document-by-document basis. (31)

         In evaluating a taxpayer's Fifth Amendment claim, the court should hold an in camera hearing (32) to examine each document and determine if the taxpayer has a "reasonable cause" to fear that criminal prosecution could result from the document's use. (33)

         Under some circumstances, possession of a taxpayer's records by the IRS after disclosure may constitute a search or seizure within the meaning of the Fourth Amendment. Should the taxpayer voluntarily disclose documents to the IRS, she may revoke her consent at "any time prior to the completion of the search." (34) In cases where a taxpayer initially grants consent and later revokes it, the IRS may only use information obtained during the period of taxpayer consent. (35)

      4. Statute of Limitations

         Although crimes arising under the I.R.C. generally have a three-year statute of limitations, the I.R.C. provides certain exceptions that extend the limitations period to six years. (36) The five I.R.C. sections covered in this Article--[section][section] 7201, (37) 7202, (38) 7203, (39) 7206, (40) and 7212(a), (41)--each fall under these exceptions. The statute of limitations begins to run on the date the taxpayer files the fraudulent document or on the date of the last affirmative act of evasion. (42) To satisfy the statute of limitations, the government need only file a complaint supported by probable cause within the limitations period. (43) The statute of limitations can be tolled for tax evasion purposes if the accused is: (i) a fugitive; (44) (ii) outside the United States; (45) or (iii) involved in related enforcement proceedings. (46)...