Tax violations.

• Author: Slachetka, Meg
• Position: Twenty-Sixth 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. 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 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. [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.

   1. Policies and Procedures of IRS Investigations

      1. Purposes of IRS Investigations

         The IRS divides enforcement of U.S. tax laws between four primary investigative divisions, the Wage and Investment Division, the Large and Mid-Size Business Division, the Small Business/Self-Employed Division, and the Tax-Exempt and Government Entities Division; Criminal Investigation (CI) investigates potential criminal violations, (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) As a result, fewer agents audit returns among the general population, reducing the percentage of total returns audited. (5)

      2. Policies

         CI 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 CI special agent may initiate a general investigation ("GI") on the basis of, inter alia, "alleged non-compliance"; if an individual or entity is identified as requiring "further evaluation for potential criminal activity," CI initiates a primary investigation ("PI"). (7) If, during the PI, further information "indicates prosecution potential exists," CI opens a subject criminal investigation ("SCI"). (8) After CI finishes 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. (9) Referral of a matter to the Tax Division terminates the authority of the CI office to employ the administrative investigation process. (10) The Tax Division generally authorizes prosecution in criminal tax cases, (11) and also supports and coordinates tax litigation. (12) U.S. Attorneys may assume responsibility for litigating criminal tax cases. (13)

      3. Constitutional Considerations

         a. Notice and Due Process Requirements

         Upon initial contact with the taxpayer who is either a subject of investigation or who may become one, special agents must identify themselves to the taxpayer as special agents of the IRS and advise the taxpayer of the pending criminal investigation. (14) While IRS guidelines mandate that special agents provide an administrative warning to the taxpayer during initial contact, a Miranda warning may not be constitutionally required in a non-custodial setting. (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 rights were violated. (20) For example, the IRS manual (21) directs that examiners and revenue officers should suspend examination or collection activity if it appears that the taxpayer's actions meet the criteria for a criminal investigation, (22) and the use of information gathered during such a covert criminal investigation may violate the taxpayer's Fourth Amendment protection against unreasonable search and seizure as well as the Fifth Amendment protection against self-incrimination. (23) 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.'' (24) Courts usually defer to the judgment of an agent in determining whether the investigation should be turned over to CI, (25) creating difficulties for taxpayers seeking to establish a constitutional violation. (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) Depending on the circumstances, however, the act of producing documents may have a "compelled testimonial aspect.'' (29) 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. (30) The applicability of the privilege is determined on a document-by-document basis. (31)

         In evaluating a taxpayer's Fifth Amendment claim, 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--[section][section] 7201, (38) 7202, (39) 7203, (40) 7206, (41) and 7212(a), (42)--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. (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 issues 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...