Tax violations.

• Author: Wohlberg, Brian
• Position: Thirtieth 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. Responsibility for Investigation and Prosecution 2. Constitutional Considerations a. Notice and Due Process Requirements b. Substantive Rights and IRS Internal Regulations c. Disclosure of Documents 3. Venue 4. Statute of Limitations B. I.R.C. [section] 7201--Tax Evasion 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--Failure to Collect Tax 1. Elements a. Duty to Collect or Account For and Pay Over Tax i. Statutory Duty ii. Responsible Person b. Willfulness 2. Defenses D. I.R.C. [section] 7203--Failure to File Taxes 1. Elements a. Requirement to File a Return b. Failure to File a Return c. Willfulness 2. Defenses E. I.R.C. [section] 7206--Tax Perjury and Aiding and Assisting Tax Fraud 1. I.R.C. [section] 7206(1)--Tax Perjury 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)--Aiding and Assisting Tax Fraud a. Elements i. Aiding and Assisting ii. Material Falsity iii. Willfulness b. Defenses F. I.R.C. [section] 7212(a)--Interference with the Internal Revenue Laws 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 of the United States Internal Revenue Code ("I.R.C."), which are prosecuted under an array of criminal tax statutes. (1)

   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 sanctions 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, venue, 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 ("Guidelines") and various possible sentencing enhancements.

   1. Policies and Procedures of IRS Investigations

      1. Responsibility for Investigation and Prosecution

         IRS agents in Criminal Investigation ("CI") investigate potential criminal violations of the I.R.C. and related provisions of Title 18 of the United States Code. (2) According to the Internal Revenue Manual, CI's mission is to foster confidence in the tax system and encourage compliance with the law. (3) To maximize deterrence of tax violations, CI focuses on individual participation in sophisticated criminal schemes, as well as high-dollar financial transactions. (4) The IRS is more likely to audit a prominent taxpayer than a relatively obscure person, (5) and the IRS audits a much higher percentage of high net worth individuals than taxpayers with lower incomes. (6) International tax havens and new electronic currencies present new challenges to the enforcement of tax law. (7)

         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. (8) Referral of a matter to the DOJ terminates the authority of CI to employ the administrative investigation process. (9)

         The DOJ's Tax Division generally authorizes prosecution in criminal tax cases (10) and also supports and coordinates tax litigation in regulatory cases. (11) U.S. Attorneys may assume responsibility for litigating criminal tax cases in some circumstances. (12)

         From 2011 through 2013, the number of investigations initiated increased each year. (12) During fiscal year 2013, the IRS initiated 5314 investigations, and obtained 3865 indictments and 3311 convictions. (14) However, in fiscal year 2014, the IRS initiated 4297 investigations, which is lower than the 2011, 2012, and 2013 rates. (15)

      2. 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

         In extreme cases, an agent's failure to follow internal procedures may provide evidence that a taxpayer's constitutional rights 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) If examination or collection activity nonetheless continues after suspension is warranted, the use of information gathered during that time 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; however, suppression may be warranted where regulations are constitutionally based or the violation implicates threats or deceit. (24) The Supreme Court has reasoned that a rigid exclusionary rule would deter the creation of regulations that protect taxpayers and would implicate separation-of-powers concerns. (25) When weighing admissibility, courts generally consider whether a regulatory 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) Specifically, "a person may be required to produce specific documents ... [that] contain incriminating assertions ... because the creation of those documents was not 'compelled' within the meaning of the privilege." (29) However, the "act of producing" 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. (30) If so, the taxpayer may successfully invoke the Fifth Amendment privilege against self-incrimination. (31) The applicability of the privilege is determined on a document-by-document basis. (32) In evaluating a taxpayer's Fifth Amendment claim, the court should hold an in camera hearing (33) 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. (34)

         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." (35) 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. (36)

      3. Venue

         Under 18 U.S.C. [section]3237(a), venue for a prosecution can be established where the offense was "begun, continued, or completed." (37) Applying this to tax violations, venue may be proper where the tax information was prepared, (38) where the tax forms were filed, (39) or where the defendant supplied the relevant information. (40) When the illegal activities occur in multiple districts, venue may be proper in more than one district. (41) A defendant is entitled to transfer venue to the district in...