Reacting and Responding to the Commencement of an IRS Criminal Investigation

How a taxpayer or tax professional reacts and responds to a visit by IRS criminal investigators may mean the difference between a criminal indictment and the IRS declining to pursue a criminal case. A taxpayer usually learns that he is under criminal investigation when Special Agents from IRS Criminal Investigation (“CI”) appear at his home or place of business.  Special Agents may also visit return preparers, legal advisors, or any other person they believe knows something about or participated in criminal wrongdoing with regard to a tax return. The taxpayer should understand that the Special Agents’ appearance means that the IRS already suspects that he has engaged in fraud.

A taxpayer who is contacted by IRS Special Agents needs to understand the seriousness of this situation.  Special Agents generally do not make random visits. A criminal investigation most often begins when an IRS civil agent suspects fraud and prepares a report referring the matter to CI for review. This report and referral is generally without the taxpayer’s knowledge.  CI may be analyzing the taxpayer’s returns and financial records without the taxpayer’s knowledge.

Occasionally, there will be indications during an IRS civil audit that a case is about to be referred to CI.  These include, but are not limited to (1) the recognition by the client or her professionals that there are a large number of errors on the return which is being audited or that significant items have been omitted or falsely deducted (2) a large number of third party interviews by the Revenue Agent (3) obtaining affidavits during a civil examination; and (4)the use of Formal Document Requests.

It is not advisable for any taxpayer to answer any questions by Special Agents without having an attorney experienced in IRS criminal investigations present. Prior to any interview the Special Agents will have done their homework, have a purpose for asking each question and may already know the answers. Even answers to seemingly innocuous questions can provide material information to the Special Agents. For example, a question about whether the taxpayer had any cash on hand at a particular time can yield facts critical to the Special Agents’ use of an indirect method of proof. The taxpayer is not required to talk to the Special Agents, and he can only do more harm than good at this stage by saying anything because everything he says can be used against him. Even “I don’t know” and “I don’t recall” are responsive answers which the Special Agents will carefully note in their memorandum to the case file and which are subject to later being used against the taxpayer or to refute a taxpayer’s testimony.  Moreover, if the taxpayer attempts to mislead the Special Agents, lies or tells half-truths, he has committed additional federal crimes. A taxpayer may be concerned that the Special Agents will draw an adverse inference from his refusal to talk to them, but Special Agents are used to dealing with taxpayers who are represented by lawyers and this procedure is plainly in a taxpayer’s interest.

When a taxpayer learns he is under investigation, he should not undertake to destroy, backdate or create evidence in order to support any defense he may believe that he has to potential charges. He also should not contact other persons with knowledge of the transactions under investigation and attempt to persuade them to testify in a manner helpful to his defense or to assert their Fifth Amendment privilege.  A taxpayer who undertakes any such activity commits independent federal crimes, often much easier to prove than criminal tax fraud and other substantive offenses. For example, to prove a document has been backdated, the Special Agents are often able to prove the age of the ink used to sign the document, the model typewriter on which it was prepared, or, by comparing the watermark with the records of paper manufacturers, the date on which the paper was made. Moreover, these crimes often translate into a quicker indictment and a more severe sentence. Taxpayers who engage in such conduct also provide the IRS important proof of willfulness and intent.  Obstruction of justice and/or interference with an administrative investigation are separate crimes.  Firing or reassigning employees who are thought to be cooperating with the IRS can constitute a separate crime, and any attempt by the client to intimidate or coerce a witness will be used by the IRS as evidence of fraudulent intent. 

A taxpayer contacted by Special Agents should ask for pertinent identifying information, including names, titles, addresses, and telephone numbers of any agents present. More than one Special Agent is likely to appear so there will be more than one witness to any statements the taxpayer might make. If one of the two agents is a Revenue Agent, it is likely that the investigation is being conducted jointly by CI and the IRS Examination Division. The Revenue Agent will assist the Special Agents in gathering the evidence to be used in the criminal case, with the additional benefit of keeping in mind the IRS’ interest in collecting any tax eventually due.

The Special Agents may also ask for copies of documents and other records from the taxpayer. It is generally not advisable to voluntarily provide documents and other records without a summons or subpoena.  If the Special Agents have a summons or subpoena for the records, the taxpayer should accept service and acknowledge receipt if asked to do so.  The taxpayer should consult with an attorney experienced in IRS criminal investigation about how and when to provide any records to the IRS.  Likewise, a tax return preparer or accountant who is visited by Special Agents should consult with an attorney before answering any questions or providing any documents.  

Finally, an accountant or tax attorney whose client is visited by IRS Special Agents should immediately advise the client to retain an attorney who is experienced in representing clients in IRS criminal investigations.  There is no privilege protecting communications between a taxpayer and his accountant in criminal proceedings and thus anything the taxpayer says to his accountant before or after the appearance of IRS Special Agents is discoverable by the IRS investigators when they interview the accountant.

For any questions on this or any other tax-related matter or white collar criminal defense matter, please feel free to contact either Joel Crouch (214) 749-2456,  jcrouch@meadowscollier.com or Mike Villa (214) 749-2405, mvilla@meadowscollier.com.