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. Fifth Amendment Issues and 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 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 various 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, as well as the applicable punishments set forth in the United States Sentencing Guidelines. Section II also addresses the basic elements of and defenses to the following 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). Finally, Section HI details criminal investigations of conspiracy to violate the tax laws under the defraud clause of 18 U.S.C. [section] 371.
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 investigations, constitutional considerations, and the statute of limitations for I.R.C. violations. Parts B through F of this Section address the basic elements and defenses 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 in the Guidelines and various possible sentencing enhancements.
Policies and Procedures of IRS Investigations
Purposes of IRS Investigations
The IRS divides enforcement of U.S. tax laws between two investigative divisions: the Examination Division investigates civil tax cases and the Criminal Investigation Division ("CID") investigates potential criminal violations. (1) According to the Internal Revenue Manual, criminal tax investigations serve two purposes: (1) to enforce the tax laws and (2) to encourage voluntary compliance. (2)
In order to maximize deterrence of tax violations, the CID 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) As a result, fewer agents audit returns among the general population, reducing the percentage of total returns audited. (5)
CID special agents are responsible for investigating alleged criminal violations under the I.R.C. and related provisions of Title 18 of the U.S. Code. (6) A special agent conducts an administrative investigation when the agent is notified of a matter that warrants further inquiry or may involve a potential criminal prosecution. (7) If the special agent believes the matter merits prosecution, a special agent's report (SAR) is prepared, outlining the details of the investigation and the agent's recommendations. (8) The matter is referred to IRS counsel, who then makes a referral to the Department of Justice ("DOJ"), Tax Division or, when authorized, directly to the U.S. Attorney's Office, whichever is more appropriate. (9) Referral of a matter to the Tax Division terminates the authority of the CID to employ the administrative investigation process. (10)
The Tax Division, under the guidance of the Assistant Attorney General generally authorizes prosecution in criminal tax cases, (11) and also supports and coordinates tax litigation. (12) U.S. Attorneys assume responsibility for litigating criminal tax cases. (13)
a. Notice and Due Process Requirements
Upon initial contact with the taxpayer, investigators must identify themselves to the taxpayer as special agents of the IRS and advise the taxpayer of the pending criminal investigation. (14) The IRS guidelines mandate that special agents provide an administrative warning to the taxpayer during initial contact, but the warning is not considered to be constitutionally required. (15)
b. Substantive Rights and IRS Internal Regulations
Evidence obtained in violation of the guidelines is not per se inadmissible, (16) as a rigid exclusionary rule would deter the creation of regulations that protect taxpayers. (17) Generally, courts consider whether a guideline violation may show bad faith on the part of the IRS. (18) However, regulations that are "mandated by the Constitution or federal law are often enforced by courts." (19)
The failure to follow such internal procedures may be evidence that the taxpayer's fights were violated. (20) For example, the IRS manual prohibits a criminal investigation from being conducted under the guise of a civil tax audit, (21) and the use of information gathered during such a covert criminal investigation may violate the taxpayer's Fourth and Fifth Amendment rights. (22) 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." (23) Courts usually defer to the judgment of an agent in determining whether the investigation should be turned over to the CID, (24) creating difficulties for taxpayers seeking to establish a constitutional violation. (25)
c. Fifth Amendment Issues and Disclosure of Documents
Although the Fifth Amendment may be invoked in any proceeding, (26) it does not shield from discovery the contents of any voluntarily prepared tax records merely because those records contain incriminating information. (27) Depending on the circumstances, however, the act of producing documents may have a "compelled testimonial aspect." (28) Accordingly, when the "act of production" itself represents an incriminating communication about the existence, possession, or authenticity of the documents, the taxpayer may invoke the Fifth Amendment privilege against self-incrimination. (29) The applicability of the privilege is determined on a document-by-document basis. (30)
In evaluating a taxpayer's Fifth Amendment claim, the district court holds an in camera hearing (31) to examine each document and determine if the taxpayer has a "reasonable fear" that criminal prosecution could result from the document's use. (32)
Should the taxpayer elect to voluntarily disclose documents to the IRS, she may revoke her consent at "any time prior to the completion of the search." (33) 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. (34)
Statute of Limitations
Crimes arising under the I.R.C. have a three-year statute of limitations. (35) The I.R.C. delineates 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 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) These tolling provisions prevent a defendant from raising procedural issues to delay a tax violation proceeding beyond the statute of limitations period.
I.R.C. [section] 7201
Violations of the I.R.C. are prosecuted under an array of criminal tax statutes. (47) Felony tax evasion, set forth in I.R.C. [section] 7201, (48) has been called the "capstone of [this] system of sanctions." (49)
To prove a [section] 7201 violation, the government must show: (i) the existence of a tax deficiency; (ii) an affirmative act constituting an evasion or attempted evasion of the tax; and...
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