Undisclosed IRS criminal audits
Periodically the IRS will examine tax returns that have been filed. These audit examinations can include any type of tax or information return. ShindelRock, as a paid preparer of these documents for our clients, will most often work with the IRS on behalf of our clients under a power of attorney and manage these audits. The audit examinations can be for income tax, employment tax, information returns or a host of other tax filings. The audits are to insure compliance with the laws and are “civil” audits that will, at worst, result in additional tax assessments.
Occasionally there are suspicions by the IRS that serious mis-statements have been made on a tax return. This could be from under-reporting of income, over-reporting of expenses, other criminal activities or false information provided. Examinations in this area will be conducted by a special agent working for the Department of Justice (the IRS does not have the authority to prosecute tax crimes). The information provided and the conduct of taxpayers and their representatives during a criminal tax investigation is handled on a much different basis than that of a common civil audit.
The policy of the IRS and U.S. courts has always been to suspend civil audits if a criminal audit is being conducted, for exactly the reason noted above. The IRS has attempted to conduct parallel investigations, subjecting a taxpayer to simultaneous civil and criminal audits. The defense against a civil audit can result in possibly compromising the defense of a criminal case, and vice versa. The standards are not the same. The benchmark case in this area, decided in 1977, was known as Tweel. In Tweel the accountant questioned the IRS agent about whether a criminal case was also in place. The agent mis-represented to the accountant and did not mention that a criminal case was also in progress. The Court found that this deliberate deception resulted in a decision in favor of the taxpayer, and the records would all be suppressed.
A recent example of this just occurred in Baltimore where six police officers are charged in the death of an individual while in their custody. The criminal case is just starting. The City has announced, however, a civil “settlement” payment of $6.4million to the family of the deceased. This pre-emptive payment will seriously confuse the criminal case. This is exactly the reason that civil cases are suspended pending a criminal investigation.
The Tweel case has now been eroded. Parallel investigations, simultaneous criminal and civil audits, can be in place and the taxpayer, and their accountants, not be made aware of the criminal proceeding. The ordinary dialogue and documentation provided to an IRS agent to manage and successfully conclude a civil case can compromise a criminal case. The conduct necessary to defend against a criminal case can impair the ability to defend against challenges in a civil case. Also, a taxpayer subject to a criminal investigation should retain competent tax counsel.
In 2009 and again in 2010 the Internal Revenue Manual has been revised in this area. The IRS now instructs agents to not disclose parallel audits and to continue working with taxpayers on a civil basis while also working with criminal agents. An IRS auditor cannot intentionally mislead a taxpayer if asked whether a criminal case is also in progress. If the agent does not respond with a clear “no” that there is no other parallel examination, the CPA for the taxpayer should treat the exam as if it is a criminal case. While this may result in a less than optimum civil resolution it will not compromise a potential criminal prosecution.
The policy of parallel investigations creates a no-win situation for the taxpayer and the CPA representing this client.