Tax violations.

AuthorBasinski, Sean
PositionAnnual white collar crime survey

    This Article outlines the elements, defenses, and sentencing consequences of various criminal tax violations under the major sections of the United States Internal Revenue Code ("I.R.C."), [subsections] 7201, 7202, 7203, 7206, and 7212(a). Section II of the Article examines the policies and procedures of Internal Revenue Service ("IRS") investigations and the applicable punishments set out in the Federal Sentencing Guidelines. Section II also addresses the basic elements and defenses to the crimes of: tax evasion under [sections] 7201; failure to collect tax in violation of [sections] 7202; willful failure to file taxes under [sections] 7203; "tax perjury" and "aiding and assisting" tax fraud under [sections] 7206; and interference with the administration of internal revenue laws under [sections] 7212(a). Section III details criminal investigations of conspiracy to violate the tax laws under the defraud clause of 18 U.S.C. [sections] 371.

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

    Part A of this Section examines the policies and procedures of IRS investigations, the role of counsel in criminal tax cases, and the statute of limitations for I.R.C. violations. Parts B through F of this Section address the basic elements of and defenses to: 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 out in the Federal Sentencing Guidelines and various possible enhancements.

    1. Policies and Procedures of IRS Investigations

      1. Purposes of IRS Investigations

        Criminal tax investigations serve two purposes as set forth in the Internal Revenue Manual: (1) to enforce the tax laws and (2) to encourage voluntary compliance.(1) To achieve maximum deterrence, the IRS's Criminal Investigation Division ("CID") focuses on individuals participating in illicit activities involving sophisticated criminal schemes and on high-dollar financial transactions.(2) The IRS also "may be more likely to press a case involving a ... prominent taxpayer than a relatively obscure person."(3) As a result, few agents remain available to audit returns among the general population, thereby reducing the percentage of total returns audited.(4) The IRS's focus on prominent individuals and illicit activities, however, may be insufficient to significantly enhance voluntary compliance.(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 she receives a matter with potential for criminal prosecution or warranting further inquiry.(7) If the special agent believes the matter merits prosecution, she must prepare a special agent's report ("SAR") explaining the details of the investigation, its results, and the agent's recommendations.(8) Finally, she must refer the matter to IRS counsel, who then makes the referral to the Department of Justice (DOJ), Tax Division or, where authorized, directly to the U.S. Attorneys for the jurisdictions where venue most appropriately lies.(9) Referring the matter to the Tax Division terminates the CID's authority to employ the administrative investigation process.(10)

        Under the Assistant Attorney General's direction, the Tax Division has authority to authorize prosecution in criminal tax cases.(11) In addition, the Tax Division supports and coordinates tax litigation.(12) Once authorized by the Tax Division, U.S. Attorneys assume responsibility for litigating criminal tax cases.(13)

      3. Reform

        The Internal Revenue Service Reform and Restructuring Act of 1998 was signed into law on July 22, 1998.(14) It had considerable impact on many IRS policies and practices.(15) For example, the statute establishes a nine-member board, which includes private citizens who can oversee administration of the agency and recommend hiring and firing of commissioners, and shifts the legal burden of proof in civil cases from the taxpayer to the IRS.(16) The Act does not materially change the policies described above.(17)

      4. Constitutional Considerations

        a. Notice/Due Process Requirements

        Standard procedure in investigative proceedings includes a surprise visit to the taxpayer by the investigating special agent.(18) Occurring at the beginning of an investigation, the surprise interrogation is often when the taxpayer first learns of the criminal inquiry.(19) Upon the initial noncustodial contact with the taxpayer, the investigator must identify himself as a special agent of the IRS and advise the taxpayer that he is under criminal investigation.(20) While not constitutionally required,(21) IRS manual guidelines also mandate that special agents provide a Miranda-type warning to the taxpayer during this initial contact.(22) Evidence obtained in violation of the guidelines, however, is not automatically inadmissible.(23) In such a situation, courts consider whether the guideline violation may show bad faith on the part of the IRS.(24)

        b. Fifth Amendment Issues and Disclosure of Documents

        Special agents routinely issue administrative summonses to obtain a suspect taxpayer's books and records for use in investigations.(25) The Ninth Circuit has held that, in response to a summons, "a claim of Fifth Amendment privilege may be asserted [by the taxpayer] if there are substantial hazards of self-incrimination ... [in] that information sought in an IRS summons might be used to establish criminal liability."(26) Taxpayers must invoke the Fifth Amendment privilege on a question-by-question and document-by-document basis, rather than in blanket fashion.(27)

        Should the taxpayer elect not to assert her Fifth Amendment privilege and voluntarily disclose documents to the IRS, she may revoke her consent at any time prior to the completion of the search.(28) 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.(29)

      5. The Role of Counsel

        As soon as the taxpayer retains counsel, usually after the special agent's surprise visit, counsel should advise the taxpayer to refrain from all further communication with IRS representatives.(30) In addition, counsel should obtain a power of attorney from the taxpayer to initiate and facilitate communication with the special agent.(31) Counsel should also determine what documents, if any, the taxpayer has voluntarily furnished to the special agent, advise the taxpayer to revoke the consent related to such voluntary disclosure, and promptly seek the return of such documents.(32)

        As a matter of strategy, at this stage of the investigation, counsel must decide upon an appropriate level of cooperation with the IRS.(33) Although cooperation may affect the conduct of the investigation or lessen the punishment after prosecution, it usually has little impact on whether an agent recommends prosecution.(34) However, after counsel conducts a thorough investigation, if the evidence clearly reflects the taxpayer's innocence and the IRS appears unsure of its case, cooperation will more likely facilitate a prompt termination of the investigation.(35) Conversely, if it cannot be determined with certainty that the taxpayer does not have criminal exposure, one commentator suggests that it is generally a more prudent choice for the taxpayer not to cooperate in any fashion and force the government to shoulder its burden of proof.(36)

      6. Statute of Limitations

        Crimes arising under the I.R.C. have a three year statute of limitations.(37) The I.R.C. delineates certain exceptions, however, which extend the limitations period to six years.(38) The five I.R.C. sections covered in this Article, [subsections] 7201,(39) 7202,(40) 7203,(41) 7206,(42) and 7212(a),(43) have all been held to 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.(44) The government need only file a complaint within the limitations period to begin the criminal procedure.(45) The statute of limitations can be tolled for tax evasion purposes if the accused is a fugitive, is outside the United States,(46) or is 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) The "capstone of [this] system of sanctions"(49) is the provision found in I.R.C. [sections] 7201: felony tax evasion.(50)

      1. Elements

        To prove a [sections] 7201 violation, the government must show: (1) the existence of a tax deficiency; (2) an affirmative act constituting an evasion or attempted evasion of the tax; and (3) willfulness.(51) The government bears the burden of proving each element beyond a reasonable doubt.(52)

        a. Existence of a Tax Deficiency

        While all circuit courts reviewing [sections] 7201 convictions require proof of a tax deficiency, the courts disagree about what constitutes a deficiency. Most circuits demand only a deficiency,(53) while the Second, Fourth, and Tenth Circuits require a "substantial" deficiency.(54) The term "substantial" refers to the "amount of the tax evaded," not the amount of unreported income;(55) however, no court has clearly defined how substantiality is to be measured.(56)

        The existence of a deficiency may be demonstrated by the use of either direct or circumstantial evidence.(57) The "specific item method" provides the most accurate means of proving a deficiency with direct evidence. Under this method, the taxpayer's books and records provide direct evidence that the taxpayer did not report taxable...

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