Monthly Archive: January 2017

IRS Criminal Tax Audit

Welcome to TaxView with Chris Moss CPA Tax Attorney

If your income tax returns have ever been audited by the IRS you might remember discussing with your husband whether you should represent yourself in the audit or retain the person who prepared your tax return to represent you? Or if your tax structure was a bit more complex you may have considered hiring a tax attorney.  Whoever you chose to represent you becomes important due to the remote possibility that an IRS agent during a routine examination of your tax return might refer your case or at least consider referring your case to the IRS Criminal Investigation Division (CID) all because of something you said to the agent.  Furthermore, did you know your constitutional 5th amendment right to remain silent also applies to an IRS audit?  Indeed,  unbeknownst to most Americans without the benefit of Miranda type warnings, these clashing interests between your right to remain silent and the Government’s right to collect taxes, emerge at the precise moment that the IRS examining agent begins your audit.  While only a few thousand taxpayers actually are indicted and convicted of tax evasion each year, just the threat of a criminal investigation may be enough to turn your life inside out.  So if you are interested in learning the best way in 2017 to fully cooperate with the Government’s legitimate interest to collect taxes, but also at the same time fully protect you and your family from harm, stay with us on Taxview with Chris Moss CPA Tax Attorney to learn how to defend yourself from an IRS Criminal Tax Audit that may find its way to your front door.

So how could something you say in 2017 during a routine IRS audit examination trigger the involvement by the CID?  First some background on the CID:  The IRS Criminal Investigation Division (CID)  is comprised of approximately 3,500 employees worldwide, approximately 2,500 of whom are special agents whose investigative jurisdiction includes, but is not limited to, tax, money laundering and Bank Secrecy Act laws. The IRS site goes on to say that IRS special agents must follow strict procedures to initiate an investigation and recommend prosecution to the Department of Justice. These procedures include approval by several IRS officials to ensure investigations are based on factual evidence that tax fraud or another financial crime has occurred. CID publishes an annual business plan and is the only Federal agency that can investigate potential criminal violations of the Internal Revenue Code.

In order to better understand the significance of the words we say to the IRS examination agent, let’s review the Greve case decided in 2007, US v Greve US Court of Appeals for the 7th Circuit.  James Greve head of his family business was audited by IRS examination division in 1997 by agent Luke. As the audit progressed Greve seemed disorganized and overwhelmed.  By 2001 examination agent Luke and other revenue agents were considering a referral to CID. As a result, Greve was indicted by a Grand Jury in 2005. Greve was subsequently convicted and found guilty of criminal tax evasion.

Greve lost his appeal to Federal District Court and then appealed to the 7th Circuit filing a motion to suppress and dismiss his statements to the IRS agents based on 5th Amendment violations of his right to remain silent. Greve contends in his motion that Luke affirmatively mislead him by continuing to conduct a civil audit after she had firm indications of fraud. Specifically, Greve maintains that Luke made false promises to him by repeatedly advising him that his cooperation would result solely in a civil tax assessment. This allegedly caused Greve to talk too much in violation of his 5th amendment right to remain silent in a possible criminal proceedings. The Court did not agree.

Although the IRS regulations require a civil investigator to cease her investigation when she has developed firm indications of fraud, see Internal Revenue Manual §§ 4565.21(1), 9311.83(1), we have held that “[a] failure to terminate a civil investigation when the revenue agent has obtained firm indications of fraud does not, without more, establish the inadmissibility of evidence obtained by [the agent] in continuing to pursue the investigation.”  United States v. Kontny, 238 F.3d 815, 820 (7th Cir.2001). Based on this interpretation of Kontny, the Court found for the US Government.  United States wins, Greve loses.

Moving to Kontny, the facts are simple: The Kontnys owned an equipment supply business. For over 10 years they defrauded the government of payroll and income taxes by not reporting overtime of their employees to the IRS. The employees knew about this scheme and benefited as well. However, as a result of a labor dispute, one of the disgruntled employees informed CID of the IRS about the scheme. CID assigned civil agent Furnas, who know all about the CID involvement, to investigate Kontny’s tax return. Kontny talked with Furnas before hiring legal counsel. Partly due to his excessive chatter with Furnas, Kontny was convicted of tax fraud and sentenced to jail. Kontnys motion to suppress his statements to Furnas based on the 5th amendment right to remain silent was denied by the District Court and Kontny appealed to the 7th Circuit where his motion was denied.

Judge Posner’s Opinion was that Kontnys talking to Furnas was voluntary and therefore not protected by his 5th amendment right to remain silent. The Court notes that virtually all cases involving coerced confessions involve the questioning of a suspect who is in police custody, an inherently intimidating situation in which people find it difficult to stand up for their rights or even to think straight. The situation is different when a person who does not even know that he is a criminal suspect (that is a premise of the Kontnys’ appeal) is being interviewed in his home, and by a civil rather than a criminal investigator to boot. Furnas was unarmed, un-uniformed, unaccompanied. The Kontnys were at no disadvantage in dealing with him. They were under no pressure to answer his questions. Any answers they gave were voluntary. Trickery, deceit, even impersonation do not render a confession inadmissible, certainly in noncustodial situations and usually in custodial ones as well, unless government agents make threats or promises citing a pre Miranda case, Frazier v. Cupp, 394 U.S. 731.  United States wins, Kontny losses.

But what if you never see or talk to the IRS during the audit because you retain the non-attorney tax preparer who prepared your tax returns to represent you in the audit, just like former Judge Diane L Kroupa did in US VS Kroupa USDC (2016) District of Minnesota Case No 0:16-cr-00084.   Kroupa , a former tax court judge no less, was accused of various tax crimes involving false information she was sending to her tax preparer.  She was indicted and pled guilty to one count of impeding, impairing, obstructing and defeating the lawful functions of the US Department of Treasury in violation of US Code Section 371.  More specifically Kroupa gave false information to her non attorney tax preparer, who then in turn gave the false documents to the IRS. During the routine audit, the tax preparer claimed to be unaware that these documents were false and clearly testified against Kroupa.  While the outcome might have been very different if a tax attorney represented Kroupa at the very beginning of the audit, the facts show unfortunately for Kroupa that no tax attorney had ever been retained.  United States wins, Kroupa loses.

In conclusion, it appears to me that if you get audited by the IRS in 2017 and you have sufficient assets to protect and rather complex structures and tax strategies to explain, best practice would be to have your tax attorney do the talking. Better yet, have your tax attorney prepare your personal and business tax returns and have that same tax attorney guarantee that she will be there years later during an audit to do the talking. A good tax attorney during the routine audit examination will represent you, effectively communicate with the Government agents, keep you safe, your assets preserved and your family protected to keep that  IRS Criminal Tax Audit  far away from your door.

Thank you for joining us on TaxView with Chris Moss CPA Tax Attorney.

See you next time on TaxView.

Kindest regards
Chris Moss CPA Tax Attorney