When a client has a tax problem, that may also be a criminal tax case problem since they crossed the line of mere negligence to civil fraud, extra steps are needed to protect the clients interests. As in all cases, there is not a bright line between civil and criminal tax cases, and many tax cases with the potential for criminal prosecution are resolved through civil proceedings.
A criminal tax case involved when the taxpayer willfully violated the tax laws. The most common examples of this is tax evasion or failing to file a tax return. Typically, the government must institute criminal charges within six years of the due date of the tax return. Criminal tax cases are typically investigated within the IRS by special agents. Many cases start of civil audits, and as information is uncovered that leans toward potentially criminal conduct, the audit can shift to the criminal investigation group within the IRS. Therefore, it is important to recognize the warning signs that the person handling the civil audit, whether it is a compliance officer of revenue agent, is going to suspend the audit and refer the case to the criminal investigation unit. Since the IRS will not tell the taxpayer about the potential criminal investigation, the clearest indicator that the case was referred is it is difficult to reach the civil auditor after many attempts. However, before that happens there are warning signs to look for that the case is headed in the direction of a criminal issue when during the course of the audit the auditor asks for many details related to omitted income, the audit is taking longer than normal, the auditor is issuing summons to third parties, or is making copies of all the relevant documents. Most seasoned tax professionals can spot this issue fairly easy.
The next issue therefore, is how to handle the case at that moment you suspect a criminal tax issue. A IRS special agent will normally want to visit the taxpayer at their home, as a surprise tactic to gather information. The taxpayer should not let the agent into the home, and should tell the agent they are retaining council to assist with the matter. Since this initial interview may be the most important event during the case, it has to handled with care. Many honest taxpayers believe that they can talk their way out of trouble, but then they start making admissions and factual misstatements that criminally hamper their case. In most cases, a tax attorney should be the person explaining to the IRS why certain items are missing from the tax returns, and the taxpayer should remain quiet.
During the audit, once it turns to have a potentially criminal overtone, there should be a shift from how the representative shares information with the IRS. In a civil audit, we tend to be forthcoming since the burden of proof is on the taxpayer to prove income and deductions on the tax return are correct. In a criminal case, we often use the term “given the appearance” of cooperation in order to protect our clients interest, and not alerting the IRS to issues.