Criminal Tax Attorney

How criminal tax cases start

Most criminal tax cases start inside a civil audit, and the rest start with information the government received from someone else.

• A civil audit referral. A revenue agent who finds firm indications of fraud stops the examination and sends the file to IRS Criminal Investigation on Form 2797, without telling you. Our IRS audit attorney page covers the eggshell audit.
• CI on its own, from currency transaction reports, Form 8300 cash filings and other investigations.
• A grand jury subpoena to your business, your bank or your accountant, which means an Assistant United States Attorney is already involved.
• A whistleblower. Section 7623 of the Internal Revenue Code pays informants 15 to 30 percent of what the IRS collects, usually a former spouse, partner or bookkeeper filing Form 211.
• A bank’s suspicious activity report, filed under the Bank Secrecy Act when cash activity looks structured to stay under $10,000.

What IRS special agents actually do

Special agents are armed federal law enforcement officers, and their first visit is designed to get a statement from you before you have talked to a lawyer. They arrive in pairs, unannounced, advise you of your right to remain silent and to counsel, and then ask questions that sound harmless. Every answer is written down, and a false one is a separate crime under section 1001 of title 18 of the United States Code. They also interview your customers, employees and preparer, and summons your bank records under section 7602 of the Internal Revenue Code; you are generally entitled to notice of a third-party summons and, under section 7609, 20 days to petition to quash it.

The statutes the government charges

Five statutes cover most federal criminal tax cases, and each turns on willfulness, the voluntary and intentional violation of a known legal duty.

• Tax evasion, section 7201 of the Internal Revenue Code: a willful attempt to evade a tax or its payment, requiring a deficiency and an affirmative act of concealment; a felony, up to five years for each count. Our tax evasion lawyer page covers the elements and defenses.
• Willful failure to file or pay, section 7203: a misdemeanor, up to one year for each year, for knowing inaction without an affirmative act.
• False returns, section 7206(1): signing a return you did not believe was true on a material matter; a felony, up to three years for each count, with no tax loss required.
• Employment tax, section 7202: willful failure to pay over withheld payroll tax; a felony, up to five years.
• Structuring, section 5324 of title 31 of the United States Code: splitting cash deposits to stay under $10,000; a crime even when the cash was legal, and often the easiest count to prove.

Conspiracy, money laundering and FBAR counts are covered on our tax fraud attorney page.

What to do, and not do, in the first days

Say nothing to the agents beyond the fact that you are represented, preserve everything, and change nothing until you have talked to counsel.

• Do not sit for an interview without a lawyer. Give the agents your attorney’s name and take their card.
• Do not destroy, alter or move records, or delete messages. Obstruction is often easier to prove than the tax charge it was meant to hide.
• Do not amend returns without advice. An amended return is a signed admission of what the original left out, and sometimes it is the affirmative act the government was missing.

Privilege and the Kovel accountant

What you tell your attorney is privileged, and what you told your accountant is not, because the practitioner privilege in section 7525 of the Internal Revenue Code does not apply to criminal matters. The government summonses the preparer and the workpapers in nearly every CI investigation, and the preparer who signed the returns is a fact witness. We retain any accountant under a Kovel arrangement, from United States v. Kovel, 296 F.2d 918 (2d Cir. 1961): the accountant works for the law firm, so the reconstruction of your returns stays privileged.

Voluntary disclosure

If the government has not contacted you, the IRS voluntary disclosure practice may still be open, and it closes the day the IRS starts an examination or investigation of you or receives information about you from a third party. The disclosure is filed on Form 14457 in two parts, a preclearance request that CI answers first and then six years of returns, with payment arrangements and a 75 percent civil fraud penalty on the highest year. It guarantees nothing, but a timely, truthful and complete disclosure ordinarily results in no prosecution.

The stages of a federal criminal tax case

A federal criminal tax case moves through six stages, and the defense has a different job at each one.

• Investigation. CI builds the file from records, interviews and summonses; we control contact, protect privilege and do the accounting inside Kovel.
• Referral to the Department of Justice Tax Division, which has to approve every tax prosecution. Counsel can request a conference at CI and at the Tax Division.
• Indictment by a grand jury once the Tax Division authorizes charges.
• Plea or trial. Most federal tax cases resolve by plea; a trial is the right choice when the government cannot prove willfulness.
• Sentencing under the Sentencing Guidelines, where the range comes from the tax loss under section 2T1.1.
• Restitution to the IRS, usually ordered at sentencing and assessed under section 6201(a)(4) of the Internal Revenue Code, while the civil tax, the section 6663 fraud penalty and interest remain.

The California side: FTB, CDTFA and EDD referrals

California prosecutes tax crimes separately, and its three tax agencies refer cases to county district attorneys. The Franchise Tax Board refers income tax cases under sections 19705 and 19706 of the Revenue and Taxation Code, false returns and willful failure to file. The California Department of Tax and Fee Administration refers sales tax cases, and section 7153.5 of the Revenue and Taxation Code makes evasion a felony once the unreported liability reaches $25,000 in twelve months. The Employment Development Department refers payroll tax cases under sections 2117.5 and 2118.5 of the Unemployment Insurance Code, usually cash payroll and withholding kept from employees. A state case can run alongside a federal one, and we run both from one file. Our San Diego criminal tax attorney page covers the local courts.

How long a criminal tax investigation takes

A CI investigation commonly runs one to three years before referral, and the whole case, from first contact to sentencing, often takes two to four years. Those are ranges from our own matters: some investigations close in months because CI declines the case, and others run longer because a grand jury or a parallel state case is still working. The timeline is mostly the government’s.

How do I know if I am under criminal investigation by the IRS?

The clear signs are a visit from two special agents, a summons or subpoena served on your bank or accountant, and a civil audit that stops without explanation. Agents will not tell you a referral has been made, so have counsel make the next contact.

Do I have to talk to IRS Criminal Investigation agents?

No. There is no obligation to answer a special agent’s questions, and declining is not evidence of anything. Give them your attorney’s name and take their card. A false statement to an agent is a separate federal crime, one more reason the conversation should happen through counsel.

Can my accountant handle an IRS criminal investigation?

No. Your accountant has no privilege in a criminal matter, will be summonsed, and is a witness to what you said and what the returns contain. A criminal tax attorney takes over contact, protects privilege, retains a Kovel accountant, and deals with the grand jury and the Tax Division.