Fraudulent Tax Returns?
Posted on: August 17, 2013 | By: dunn_access | Criminal Tax Prosecutions
By Stephen J. Dunn
Filing a tax return which the taxpayer knows materially underreports his tax is unwise. It can cost the taxpayer far more in assessments of tax and penalties ultimately made, as well as attorney fees, than the amount of tax evaded. It can even result in the taxpayer being prosecuted, convicted, and imprisoned.
The IRS most commonly learns of alleged fraud in a tax return from an insider—a disgruntled former employee, spouse, or romantic interest of the taxpayer. In one case, the taxpayer’s estranged daughter came to the taxpayer and asked him for a job. The taxpayer hired her, and eventually placed her in charge of a business. But the daughter mismanaged the business, and the taxpayer closed it. The prodigal daughter became enraged, and reported her father to the Internal Revenue Service. IRS Criminal Investigation Division then investigated the taxpayer’s tax returns. A pair of undercover IRS special agents began appearing at the taxpayer’s principal business, feigning interest in purchasing business. The taxpayer fell for the ruse, and “puffed” to the purported prospective purchasers, claiming that he actually had substantially more income than reported on this tax returns.
The situation would have been manageable if the IRS did not have the most damning evidence of all—documentary evidence from a third party. The taxpayer had two bank accounts. He used the first account to deposit receipts which he reported to his accountant, and which the accountant reported on his tax return. Receipts deposited into the second account were not reported to the accountant, or on the taxpayer’s tax return. The IRS learned of the second account from the disgruntled daughter, and subpoenaed bank statements of the account.
In divorces, one spouse often attempts to extort a better financial settlement by threatening to report problems in the other spouse’s tax returns to the IRS. But if the tax returns are joint tax returns, the reporting spouse will need a grant of immunity from the IRS.
Here is some advice for a taxpayer who may have filed a tax return materially underreporting his tax:
Retain competent counsel. I am talking about an attorney experienced in representing taxpayers in criminal tax cases. Not a criminal generalist attorney, or a tax generalist. For God sakes not an accountant. Accountants are profoundly ill-equipped to represent taxpayers in criminal tax investigations. Moreover, there is no accountant-client privilege in Federal court. When the IRS investigates a criminal tax case, one of the first things it does is subpoena the taxpayer’s accountant and compel him to tell everything he knows about the case, and produce his documents concerning the taxpayer. Concerned about complicity in the alleged tax fraud, the accountant may be anxious to talk with Federal prosecutors, in return for immunity.
Don’t talk with Federal agents, or with anyone who mysteriously appears at the taxpayer’s business. Tax crimes are specific intent offenses—the IRS must prove beyond a reasonable doubt that the taxpayer knew that his tax return materially understated his tax. One of the best ways for the government to prove is by the taxpayer’s own admissions. IRS agents make detailed notes of an interview of a taxpayer, and often embellish the taxpayer’s statements, or misquote the taxpayer. The taxpayer is better off leaving communication with Federal agents to his counsel.
Don’t panic. The IRS has a heavy burden. The more complicated the facts and the law, the tougher it is to prove that the tax returns materially understated tax, or that the taxpayer knew it. This too shall pass.
Consider a voluntary disclosure. If the facts clearly establish a material underreporting of tax, the taxpayer should consider making a voluntary disclosure. This decision should not be delayed, as the IRS will accept a voluntary disclosure only as long as the IRS has not opened an investigation of the tax returns. The IRS no longer recognizes “quiet” voluntary disclosures. Taxpayer’s counsel makes an initial inquiry of IRS CID as to whether there is a tax fraud investigation afoot at to the taxpayer. If the answer is negative, then taxpayer’s counsel may submit a voluntary disclosure for the taxpayer, under guidelines prescribed by IRS. IRS CID will then send taxpayer’s counsel a letter stating that if the taxpayer does what the IRS requires, including filing appropriate amended tax returns and paying the tax due thereon, the taxpayer will not be prosecuted. The IRS will conduct a civil audit of the amended tax returns.
Don’t ignore the problem, but rationally analyze options with counsel.