There are numerous different criminal statutes in the Internal Revenue Code dealing with evasions, false statements, and omissions in the filing of tax returns. While civil attempts to collect tax debts are encountered relatively frequently (liens, garnishments, etc.), criminal prosecutions for tax matters are rare.
The IRS does have a criminal investigations unit which handles such matters, and if a decision to prosecute is made, the file is normally referred to the Justice Department. Some possible indications that a civil audit may escalate into a criminal investigation may be: a special agent joining the case, summonses being sent to third parties, or lengthy and multiple audit sessions.
The IRS has the ability to issues summonses to produce records and testimony. Such a summons can be issued to any taxpayer. This authority is limited; once a recommendation to prosecute is made to the Justice Department, this authority ends.
For a summons to be valid, it must show that the investigation is done for a legitimate purpose, that the inquiry is relevant and related to that purpose, that the IRS does not already have the information, and that proper procedures have been followed. U.S. v. Powell, 379 U.S. 48 (1964). Failure to respond to a summons may be grounds for a contempt action in federal district court. A taxpayer may assert various privileges and defenses on his or her behalf.
When the IRS’s criminal investigations unit forwards a case to the district counsel, an invitation to a conference may be extended to the taxpayer or his counsel. After the conference, further decisions may be made on the file regarding whether to prosecute. When the taxpayer’s counsel authenticates a written instrument, there is some authority that admissions made by counsel during conferences may constitute vicarious admissions which may be used against the taxpayer. U.S. v. O’Connor, 433 F.2d 752 (1st Cir. 1970).
The mental state required in criminal tax cases is one of specific intent: the defendant must have acted willfully, not recklessly or negligently. The government must prove that a duty existed for the defendant to do something, and that the defendant intentionally and voluntarily violated that duty. An honest misunderstanding of one’s duties (e.g., relying on the advice of a professional) is a defense. Some of the possible tax crimes are the following:
- Tax evasion (I.R.C. Section 7201). The elements of this offense are that a tax payment was due, that the defendant made an affirmative act to evade or defeat the tax, and that he acted willfully.
- Willful failure to collect or pay over tax (I.R.C. Section 7202). This provision was designed to cover situations where employers must withhold and pay sums withheld by employees. Again, willfulness is an element of the offense here.
- Willful failure to file return, pay tax, or supply information (I.R.C. Section 7203). This provision was intended to apply to situations where persons are required to keep records or supply information , and willfully fail to do so.
- Other federal criminal tax offenses may be the following:
- Fraudulent statement or failure to make statement to employer (I.R.C. Section 7204)
- Fraudulent withholding exemption (I.R.C. Section 7205)
- Fraud and false statements (I.R.C. Section 7206)
- Fraudulent returns or other documents (I.R.C. Section 7207)
- Counterfeiting or reuse (I.R.C. Section 7208)
- Unauthorized use or sale of stamps (I.R.C. Section 7209)
- Attempts to interfere with the internal revenue laws (I.R.C. Section 7212)
- Unauthorized disclosure of information (I.R.C. Section 7213)
It should also be noted that there are provisions which prevent officers and employees of the U.S. government from committing unauthorized acts with regard to tax collection. Under I.R.C. Section 7214, agents of the United States cannot: knowingly extort or oppress under color of law; knowingly demand a greater sum than that allowed by law; fail to perform his or her duties with intent to defeat the application of tax laws; and cannot conspire with any person to defraud the United States.
There is a variety of defenses that can be used in tax cases. Commonly encountered defenses in tax cases are: invoking double jeopardy, invoking the privilege against self-incrimination, good faith reliance, voluntary disclosure, and selective prosecution. Other defenses may be relevant, of course, depending on the facts and circumstances of each case. It is also possible, in some cases, for other persons to be liable beyond the taxpayer, such as accountants, corporations, or other third parties.
Various methods have been employed in attempting to trace income in tax cases. These methods may include the “net worth” method, and the “deposits and expenditures” method. The government is not normally required to reconstitute a taxpayer’s income with perfect precision, but it must establish the all of the elements of the offense under which a taxpayer is charged.
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