Criminal Investigation and Prosecution

How Criminal Investigations Gets Involved

Green introduced the panelists and asked the government panelists to discuss how the IRS’s Criminal Investigation Division (CI) receives its cases. Referrals can come from IRS examiners but also from taxpayers, other law enforcement agencies, such as the FBI or Secret Service, and concerned practitioners looking to save their clients from themselves. In such cases, preparers can get themselves in hot water by lying to the IRS in order to protect their clients, which is of course a felony.

CI conducts two types of investigations: administrative and grand jury. Grand jury investigations, the more prevalent of the two, require approval from the Department of Justice to undertake and are worked alongside an assistant U.S. attorney. The grand jury entails subpoena power, she noted, and can lead witnesses to be more forthcoming than they would in an administrative proceeding.

Green then shared accounts of preparers shooting themselves in the foot by being honest about their unethical practices, seemingly unaware of what they were admitting to. His point, he said, was that clients will not hesitate to let preparers take the fall when they can, and that preparers should thus always have their own legal counsel. He also warned against endangering one’s entire career for the sake of a single client: “If one of them goes to jail, I just have one less client. If I lose my license, I’m not fit to do anything else.”

The government panelists agreed with this, and also raised the thorny issue of what counsel to given when one discovers, in the course of defending a client referred by a preparer, that the preparer may have engaged in criminal activity. Green said that he would advise the client and the preparer to seek separate counsel; Hardy disagreed, saying that “your duty and loyalty is to the client, full stop,” even if it means having the preparer sign an affidavit that places criminal liability upon himself.

Agostino raised the issue of the American Bar Association rules preventing lawyers from taking advantage of unrepresented persons. “We have an obligation as officers of the court to the public, as well. Can we, in essence, mislead by silence?” he asked. In response to a question from the audience, Green stressed that representing both the taxpayer and preparer is a clear conflict of interest and both parties should seek separate representation. Agostino and Hardy both stressed that it is important that all parties know who is and is not representing them legally.

Green then brought up the issue of fraud technical advisors (FTA), who are involved in civil IRS examinations and collections and also serve as another source of referrals to CI. The government panelists said that collection cases can and do go criminal, and cited a recent offer in compromise case in their office. Revenue officers are trained to spot fraud and consult with FTAs, with the government panelists noting that some of the best cases come out of fraud referrals.

Green asked the government speakers what CI investigators specifically look for when judging a case. Among the variety of factors were the volume of returns prepared, Schedule A deductions that look inflated, the proportion of returns resulting in a refund, and the appearance of the same deduction on multiple returns (or every return). In addition, other items cited were inflated Schedule C income, incorrect filing status, and false dependency exemptions or withholdings.

Escalation and Sentencing

There was a general discussion of how the DOJ’s tax division handles cases referred to it from CI. Cases are referred for either a grand jury investigation or prosecution depending upon how far along the investigation is. In addition, grand jury cases might not proceed to prosecution, depending on the outcome once all the evidence is presented. The division is also selective about prosecution, since a number of other civil and criminal tools exist. For prosecution, the DOJ is trying to pick high-impact cases around the country in different venues, looking for high dollars and egregious conduct. Incar-ceration is the DOJ’s goal. The government wants prison time in these cases to send a strong message to preparers that may be contemplating similar conduct.

Green asked how the DOJ and IRS decide to run parallel investigations on a case, and whether they are concerned about misleading targets about the nature of an examination. The government panelists answered that while civil injunctions are sometimes issued against preparers before, during, or after criminal proceedings in order to shut down the business and notify customers, criminal investigations are a separate proceeding. The DOJ doesn’t use a civil examination or a civil injunction proceeding to build a criminal case.

At Green’s urging, the discussion moved to sentencing. The courts begin with the general U.S. sentencing guidelines, but also look at the charge and the weight of the tax loss. If an offense’s impact is small or the preparer’s role is minor, the sentence can be reduced, but the converse also applies. Criminal history is also a factor. Finally, sentences comprise not just the question of prison time, but also penalties, fines, and restitution. Notably, restitution assessments cannot be challenged by the defendant, nor can they be subject to an offer in compromise or offset through operating losses.

Charges can include not only aiding and abetting the filing of false returns, but also false claims and statements and even conspiracy. Maximum prison sentences for such charges range from three to ten years, and the IRS chooses to focus on felony cases. The DOJ rarely agrees to a misdemeanor in a return preparer prosecution.

While the guidelines are not insignificant, the government representatives noted that sentencing is very, very discretionary. Regarding restitution orders, defense counsel has a tremendous burden to talk the presiding judge out of them. The problem noted with a restitution order is that the IRS can then make an assessment that is binding. Once the restitution order is converted to an assessment, the district court is out of the loop. They can use their full collection powers and seize everything; there has never been a chance for the taxpayer to defend himor herself against the amount of the liability or to do all the things that are possible to ease the burden.

Some of the panelists criticized restitution orders on the basis of the inherent complexity of determining the ability to pay, allocating and monitoring payments, and determining the assessment. They also questioned whether the IRS would continue to pursue restitution assessments against preparers.

The government speakers responded that the government is obligated to pursue restitution against those who aid and abet taxpayers in evasion. Although there may be issues with the process, the IRS and the DOJ will continue pursuing restitution where appropriate. While the procedural issues are outside of CI’s scope, they will be addressed, and the law will continue to develop.

Green turned the panel back to sentencing in general, noting that the preparers generally receive heavier sentences than the taxpayers they represent. Agostino agreed, attributing this to the egregiousness of the preparer’s abuse of trust. Green then asked about defense strategies, to which Hardy replied that there are basically two: that there is no underlying violation, or that the violation was unwillful and unintentional. Most cases, he said, come down to the latter, because the IRS usually has its facts straight. For preparers, this comes down to shifting the blame to the client. Rarely, he said, is the argument a good-faith misunderstanding of the law.

Hardy then opined that cases involving preparers who make limited mistakes, as opposed to fraudsters cranking out false returns on industrial level, are rare and hard to prove: “I think that most of the time, if you have a situation like that, you need super-clear bad e-mails or an undercover tape, basically.” He cited a case where a taxpayer had several undisclosed offshore bank accounts that the preparer advised him in an email never to tell the IRS about. “Most people aren’t that stupid,” Hardy continued, also saying that U.S. attorneys with high caseloads generally deprioritize tax cases in favor of bigger fish, such as drug dealers.

There was then some discussion about the IRS’s whistleblower process. While the IRS does have a reward program for whistleblowers, the DOJ’s tax division does not, although the panelists from the DOJ did urge attendees to send the division a copy any claim involving a pending case or any information pertinent to a criminal investigation.

As the panel drew to a close, Green asked for some final words. The panelists all stressed the importance of consulting counsel, regardless of one’s innocence. One panelist likened many taxpayers and preparers to a fish mounted on a wall. “Look at that guy,” he said, “he thought he was innocent, too, and if he didn’t open his mouth he’d still be in the Chesapeake Bay.”