Criminal Tax Defense
We are taught at a young age that only death and taxes are certain. Regardless of a given individual’s (or company’s) net worth, reporting and paying taxes is both inevitable and frustrating.
This is because the United States Tax Code includes a lengthy, complicated set of standards, terms, and regulations that make tax compliance oftentimes difficult. While simple individual tax returns, such as a 1040EZ, only require the submission of W-2 data and listing dependents, tax returns can become very difficult to prepare and submit accurately. For example, homeowners and contributors to charitable organizations need to become familiar with other tax forms and keep records to demonstrate what deductible expenses they actually incurred.
Because the U.S. Government has become large and highly dependent upon the collection of vast sums to support its activities, it has employed the Treasury and IRS to identify and collect unreported income. It does via a highly sophisticated civil audit and collection process and also through criminal enforcement. As former federal prosecutors who were involved in significant financial crime prosecutions, we are adept at identifying investigative techniques and finding weaknesses in the Government’s case.
Understanding Prosecution of Tax Crimes
The three primary entities that enforce criminal tax statutes are:
- DOJ Tax; and
- the USAO.
IRS-CI stands for the Internal Revenue Service-Criminal Investigations Division. IRS-CI includes thousands of highly trained agents who investigate individuals and companies for suspected tax crimes. The most common offenses are tax evasion (Attempts to Evade or Defeat Tax, 26 USC 7201), failure to file a return (Willful Failure to File Return, 26 USC 7204), false statement within a tax return (Fraud and False Statements 26 USC 7206), and filing a false return (Fraudulent Returns, Statements , or Other Documents 26 USC 7207). It is also important to recognize that IRS-CI also participates in investigations that are incidentally related to tax return preparation. For example, most High Intensity Drug Trafficking Areas (HIDTA) units include IRS agents who investigate whether drug trafficking organizations (DTOs) are also failing to pay income taxes. Further, DOJ Tax and United States Attorney’s Offices are also expanding the investigation of false tax return schemes under non-tax statutes such as money laundering (18 USC 1956 and 1957) or mail and wire fraud (18 USC 1341 and 1343).
DOJ Tax stands for the Department of Justice Tax Division located in Washington, D.C. Attorneys assigned to DOJ Tax are charged with making ultimate prosecution decisions in tax related cases. Attorneys in the division often travel to local federal districts to prosecute cases.
USAO stands for the United States Attorney’s Office which handles federal criminal prosecution among the 94 U.S. federal districts. Each US Attorney is appointed by the President and is in charge of multiple Assistant United States Attorneys and support staff. In a tax case, AUSAs (Assistant United States Attorneys) coordinate with, and seek permission from, DOJ Tax in every federal criminal tax prosecution.
People have a general sense of the term tax evasion. That is, people understand they have a duty to report their income and pay appropriate income taxes. In fact, when most people hear the term they think of wealthy individuals who simply refuse to file a tax return (or perhaps they think of Al Capone’s famous arrest for tax evasion by Elliott Ness).
However, tax evasion is a complex jurisprudential precept that is investigated and prosecuted in many ways. Principally, efforts designed to withhold legitimately owed taxes is illegal and prosecuted as tax evasion under 26 USC 7201.
ABUSIVE TAX SHELTERS
Many taxpayers are familiar with legal methods to reduce taxes such as the deduction of charitable contributions and mortgage interest. In a simplistic form, these types of deductions are tax shelters and perfectly acceptable. Incidentally, the most common type of tax shelter is the 401(k) retirement savings vehicle.
In cases where individuals accumulate higher net worth, as well as businesses, strategies to reduce taxes become more attractive. Hence, many estate planners, CPAs, and financial professionals, assist individuals and companies in this endeavor. In step, the Tax Code has expanded to a massive scope that seemingly rivals the breadth of the Library of Congress.
IRS agents and USAOs have become adept at identifying prosecution targets they contend are abusing various tax benefits allowed under U.S. law.
An abusive tax shelter is defined as a tactic by a taxpayer (individual or company) that reports income as qualifying for deduction by willfully (purposely) designating this income as part of a trust or a partnership that in reality serves little or no purpose.
For example, if a taxpayer gives $100,000 to the Catholic Church it is likely that most, if not all, of that contribution is deductible. However, if that same taxpayer creates a trust that the IRS deems not to be qualified as a 501(c) (charitable) organization or trust, and gives $100,000 to that trust, the agency may submit a tax evasion case for prosecution.
While USAO’s oftentimes paint the prosecution of what it deems to be abusive tax shelters as a simple black and white exercise to stamp out obvious and overt fraud, this characterization may be oversimplified.
Put another way, many people agree that local synagogues, churches, mosques are legitimate charities. Similarly, people agree that the United Way and Red Cross also qualify for charity status.
However, the definition of ‘charity’ is not so simple. Many other organizations qualify as 501(c) entities, contributions to which qualify for deduction.
Further, other abusive tax shelters do not relate to charitable contributions. For example, certain offshore bank account transfers, payments as ‘education expenses,’ transfer of funds that are characterized as foreign loans, or sharing of dependents by separate taxpayers all may be characterized by the IRS as unlawful or abusive.
As a more specific example, in 2005, KPMG was ordered to pay $456 million in fines for the establishment of illegal tax shelters.
The IRS acknowledges multiple tax shelter prosecutions.
The IRS also acknowledges the investigation and prosecution of return preparers.
In total, IRS-CI lists the following statistical data:
QUI TAM ACTIONS: WHISTLEBLOWER INFORMANT AWARDS
It should not be surprising that the IRS is interested in incentivizing the citizenry to report suspected tax cheats. This type of deputization strategy is also seen in the Healthcare Fraud arena via the “Qui Tam.” Put simply, the IRS and the FBI create hotlines to assist whistleblowers. The IRS takes more initiative by actually offering monetary awards for the identification and reporting of tax fraud. It is, in effect, a white collar crime stoppers.
Unfortunately, such efforts bear scrutiny. Many Qui Tams are generated by disgruntled employees. Further, reports of abusive tax shelters often do not take into account that tax policies are confusing and complex.
Simply taking a whistleblower report at face value will unfairly cast many individuals and taxpayers to unnecessary litigation costs and needlessly jeopardize liberty.
What do Do if You Are Being Investigated for Tax Evasion
Hiring the right attorney is possibly the single most important thing you can do to help yourself if you are being investigated for tax evasion.
For example, an experienced tax evasion defense attorney knows that every tax case hinges on whether or not the prosecution can show a willful mental state standard. This means that prosecutors must prove not only that tax was avoided, but that the taxpayer knew his or her (or his or her company’s) tax reporting was illegal when it was submitted. Put simply, ignorance of the law is a legal defense in tax evasion cases.
An experienced tax evasion defense attorney will also have a network of resources ranging from CPAs and forensic accountants that can assist in preparing challenges to the Government in complex tax cases. Additionally, the defense attorney will examine pre-existing relationships and interview accountants, tax preparers, estate planners, and financial advisors to evaluate whether a sustainable professional reliance defense is available. Further, the attorney will review available tax returns and financial records to evaluate whether tax returns actually contained accurate information.
It is also important that attorneys quickly discuss matters with prosecutors and agents to pursue any possibility that other resolutions, short of outright prosecution, may be available.
It will also important to consult experts who may be able to offer evidence that the purported tax in fact correctly claimed deductions and tax shelters.
Ultimately, a sophisticated, proactive posture must be quickly taken to minimize a target’s criminal exposure.
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