San Diego Criminal Tax Attorney

What makes a tax case criminal

The word that separates a civil audit from a criminal case is willfulness. Making a mistake, relying on bad advice, or not knowing income was taxable is a civil problem. It gets fixed with tax, interest, and a 20 percent accuracy penalty under IRC section 6662. Knowing the return was wrong and signing it anyway is a different matter. Once the government believes it can prove willfulness, the same facts support a 75 percent civil fraud penalty under section 6663 and, potentially, a prosecution under section 7201 (evasion, up to five years per count), section 7206(1) (filing a false return, up to three years per count), or section 7203 (willful failure to file, a misdemeanor). Conspiracy and money laundering counts get added when more than one person was involved or when the money moved through accounts in ways the government can characterize.

Here is the practical version. Most criminal tax cases start as civil audits. A revenue agent sees what the IRS Manual calls badges of fraud, such as unreported cash, two sets of books, fictitious deductions, or records that disappeared, and files a Form 2797 referral. The audit goes quiet. The taxpayer usually does not know why. Two years later, agents appear. In our practice, the cases we can do the most for are the ones where the client called during the quiet part.

The federal path in San Diego

IRS Criminal Investigation has agents posted in San Diego. Cases that survive CI’s review go to the Department of Justice Tax Division in Washington for approval, and prosecutions are brought by the U.S. Attorney’s Office for the Southern District of California, which sits downtown on Front Street. Trials are heard in the federal courthouses on Broadway. A CI investigation typically runs two to five years before an agent contacts you, and the statute of limitations for evasion is six years from the due date of the return, so the government has time to be careful. By the time you hear from them, the file is thick.

Tax Division review is a real checkpoint rather than a rubber stamp. It is also the stage where experienced counsel can engage: with a proffer where that makes sense, with an argument that the evidence proves a mistake rather than a crime, or with a plea to a lesser charge where the facts are what they are. We handle that engagement, and we prepare clients for what a proffer session actually involves before anyone agrees to one.

The state path: CDTFA, EDD, and FTB investigations

California prosecutes tax crimes too, and in San Diego those cases run through the District Attorney’s Office rather than the U.S. Attorney. Three agencies refer them:

• CDTFA. Sales tax cases turn criminal when the auditor concludes tax was collected from customers and not remitted, or when sales were hidden from the return. Revenue and Taxation Code section 7153.5 makes it a felony to file a false sales tax return with intent to evade when the unpaid tax is large enough. Restaurants and cash businesses are the usual defendants. See CDTFA criminal investigations.
• EDD. Payroll tax cases involve unreported wages, cash payroll, and withholding that was taken from employees and kept. Unemployment Insurance Code section 2117.5 covers false statements made to evade payroll tax. These cases often start as worker classification audits. See EDD criminal investigations.
• FTB. Income tax evasion and willful failure to file under Revenue and Taxation Code section 19706, usually after an audit found income the return did not. See FTB criminal investigations.

State and federal cases are not mutually exclusive. A CDTFA sales tax case can become an IRS income tax case, because the hidden sales were also hidden income, and the agencies share information. We run the two tracks from one file so a statement made to one agency does not become the other agency’s evidence.

What we do in a criminal tax case

• Take over contact. Once you are represented, agents deal with us. There is no legal obligation to sit for a CI interview, and declining is not an admission of anything. In most cases the right amount of voluntary cooperation is none, and we tell you the exceptions when they apply.
• Protect privilege. What you tell your CPA is not privileged in a criminal investigation, and the government will summon the accountant. We retain the accountant under a Kovel arrangement so the accounting work happens inside the attorney-client privilege.
• Manage the eggshell audit. When the civil audit is still open and the facts are dangerous, we run the examination so that it closes as a civil matter. What gets produced, when, and with what explanation is the whole game. This is not work for a general practitioner, and it is not work for a CPA.
• Evaluate voluntary disclosure. If CI has not contacted you, the IRS voluntary disclosure practice may still be open. It closes the day the government reaches out. We assess whether the facts qualify and how to structure the disclosure before anything is filed.
• Handle the subpoena. Grand jury subpoenas for documents and testimony have rules about privilege, the act of production, and the Fifth Amendment. We assert them.
• Negotiate the resolution. Pre-indictment resolution with the Tax Division, a plea where a trial would be worse, or trial where the government’s willfulness case does not hold. Restitution and the civil tax bill get handled in the same plan, because the criminal case ending does not make the tax go away.

Who calls us

Business owners whose civil audit went quiet. Restaurant and construction owners who received a CDTFA or EDD investigator’s card. Clients whose accountant got a summons. People with unreported foreign accounts who want to come forward before the government finds them. And, more often than you would think, people who have not done anything wrong but have a set of facts that looks bad on paper and want it handled so it stays civil. Since December 2013 the firm has represented 400+ clients in audits, and the criminal practice grew out of the difficult ones.

What it costs and how it starts

Criminal tax defense is quoted per engagement, usually as a monthly flat fee that covers a defined stage, so you know the number before you sign. The first call is 15 minutes and free, and for this kind of matter please call rather than write: (619) 378-3138. If agents are at the door right now, give them your attorney’s name, take their card, and do not sign or hand over anything. Then call. The office is at 12636 High Bluff Drive, Suite 300, in Del Mar Heights.

Frequently asked questions

Do I need a criminal defense lawyer or a tax lawyer?

A criminal tax case needs both skills in one person. The government’s case is built from returns, ledgers, and bank records, and the defense is built from the same documents. A general criminal defense attorney who cannot read the tax theory will not see where it fails. A tax attorney who has never handled a grand jury subpoena will not protect you from it. Look for a tax attorney whose practice includes IRS Criminal Investigation matters.

Can I go to jail for not filing tax returns?

Willful failure to file is a federal misdemeanor under IRC section 7203, up to one year per year not filed, and the FTB has a parallel statute. In practice, prosecutions for non-filing alone usually involve multiple years, large amounts, and something that shows the person knew. Unfiled returns are a civil problem that becomes a criminal one when you keep ignoring it, which is why we file the returns and deal with the balance before anyone asks.

What is an eggshell audit?

A civil audit where criminal exposure already exists in the facts, whether the agent knows it yet or not. The goal is to close it as a civil matter. That takes control over every document and every answer, and it is the single best reason to have counsel before you respond to an audit letter.

Will IRS agents really come to my house?

Yes. Contact during the subject stage of a CI investigation is often in person, at home or at work, early in the day, and it is usually the first sign the taxpayer gets that an investigation exists. You are not required to speak with them. Take the card and call a lawyer.

Can the CDTFA or the EDD prosecute me?

They refer cases to the district attorney, who prosecutes under state law. Sales tax collected from customers and not remitted, and payroll tax withheld from employees and not paid over, are the two fact patterns that most reliably get referred. Both usually start as ordinary audits.