Tax violations.

• Author: Sullivan, Brian J.
• Position: Twenty-First Annual Survey of White Collar Crime

1. INTRODUCTION II. CRIMINAL INVESTIGATIONS UNDER I.R.C. [subsection] 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 United States 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."), [subsection] 7201, 7202, 7203, 7206, and 7212(a).

   Section II of this Article examines the policies and procedures of Internal Revenue Service ("IRS") investigations and the applicable punishments set out in the United States Sentencing Guidelines ("Guidelines"). Section II also addresses the basic elements 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). Section III 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. [subsection] 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: 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.

   1. Policies and Procedures of IRS Investigations

      1. 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) Criminal tax investigations serve two purposes according to the Internal Revenue Manual: (1) to enforce the tax laws and (2) to encourage voluntary compliance. (2)

         The IRS, however, may not be effectively deterring tax violations. To achieve maximum deterrence, the CID focuses on individuals participating in illicit activities involving sophisticated criminal schemes and on high-dollar financial transactions. (3) The IRS also "may be more likely to press a case involving a ... prominent taxpayer than a relatively obscure person." (4) As a result, few agents remain available to audit returns among the general population, thereby reducing the percentage of total returns audited. (5)

      2. Policies

         CID special agents are responsible for investigating alleged criminal violations under the I.R.C. and related provisions of Title 18 of the United States Code. (6) A special agent conducts an administrative investigation when the agent is notified of a matter that warrants further inquiry or may involve the potential of 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) Referring the matter to the Tax Division terminates the CID's authority to employ the administrative investigation process. (10)

         The Tax Division, under the Assistant Attorney General's guidance, authorizes prosecution in criminal tax cases. (11) In addition, the Tax Division supports and coordinates tax litigation. (12) U.S. Attorneys assume responsibility for litigating criminal tax cases. (13)

      3. Constitutional Considerations

         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, (15) but the warning is not constitutionally required. (16)

         b. Substantive Rights and IRS Internal Regulations

         Evidence obtained in violation of the guidelines is not per se inadmissible (17) because a rigid exclusionary rule would deter the creation of regulations that protect taxpayers. (18) Generally, courts consider whether a guideline violation may show bad faith on the part of the IRS. (19) However, a court may have a duty to enforce regulations that are "mandated by the Constitution or federal law." (20)

         Some circuits have found that failure to follow such internal procedures may be evidence that the taxpayer's rights were violated. (21) For example, the IRS manual prohibits a criminal investigation from being conducted under the guise of a civil tax audit. (22) The use of information gathered during this covert criminal investigation may violate the taxpayer's Fourth and Fifth Amendment rights. (23) However, the burden is on the taxpayer 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." (24) Courts usually defer to the IRS agent's judgment in determining whether the investigation should be turned over to the CID. (25) This makes it difficult for the taxpayer to show that a constitutional right has been violated. (26)

         c. Fifth Amendment Issues and Disclosure of Documents

         Although the Fifth Amendment may be invoked in any proceeding, (27) it does not shield from discovery the contents of any voluntarily prepared tax records merely because those records contain incriminating information. (28) However, depending upon the circumstances, the act of producing documents may have a "compelled testimonial aspect." (29) When this "act of production" itself represents an incriminating communication about the existence, possession, or authenticity of the documents, then there is a "compelled testimonial aspect" and the taxpayer may invoke the Fifth Amendment to protect against self-incrimination. (30) In doing so, the taxpayer may not invoke the Fifth Amendment in a blanket fashion, but must do so on a question-by-question or document-by-document basis. (31)

         To evaluate the taxpayer's Fifth Amendment claims, the district court holds an in camera hearing (32) to examine each document and determine if the taxpayer has a "reasonable fear" that criminal prosecution could result from the document's use. (33)

         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." (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

         Crimes arising under the I.R.C. have a three-year statute of limitations. (36) The I.R.C. delineates certain exceptions that extend the limitations period to six years. (37) The five I.R.C. sections covered in this Article--[subsection] 7201, (38) 7202, (39) 7203, (40) 7206, (41) and 7212(a), (42)--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. (43) To satisfy the statute of limitations, the government need only file a complaint within the limitations period. (44) The statute of limitations can be tolled for tax evasion purposes if the accused is: (i) a fugitive; (45) (ii) outside the United States; (46) or (iii) involved in related enforcement proceedings. (47) These tolling provisions prevent a defendant from raising procedural matters to delay a tax violation proceeding beyond the statute of limitations period.

   2. I.R.C. [section] 7201

      Violations of the I.R.C. are prosecuted under an array of criminal tax statutes. (48) Felony tax evasion, set forth in I.R.C. [section] 7201, (49) has been called the...