Eric L. Green Eric is a partner with Green & Sklarz, LLC in - - PDF document

8/7/2018 1

ELEVATE National Conference 2018 Anaheim

National Conference

Criminal Tax Investigations: What to Do When Uncle Comes Knocking?

ELEVATE National Conference 2018 Anaheim

Eric L. Green

Eric is a partner with Green & Sklarz, LLC in Connecticut and New York The focus is civil and criminal taxpayer representation Has served as adjunct faculty at the University of Connecticut School of Law Author of the Accountant’s Guide to IRS Collection (www.TGPublish.com/shop) Founder of Tax Rep LLC – www.taxrepllc.com Columnist for the Journal of Tax Practice & Procedure & Forbes Weekly Tax Rep Podcast in ITunes: https://itunes.apple.com/us/podcast/podcasts-tax-rep- llc/id1276903945?mt=2 Past Chair of the Executive Committee of the Tax Section of the Connecticut Bar Association Fellow of the American College of Tax Counsel

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Offenses Involving Taxation

The criminal tax laws are designed to protect the public interest in preserving the integrity of the nation’s tax system. Criminal tax prosecutions serve to punish the violator and promote respect for the tax laws. Because of the limited number of criminal tax prosecutions relative to the estimated incidence of such violations, deterring others from violating the tax laws is a primary consideration underlying these guidelines. Recognition that the sentence for a criminal tax case will be commensurate with the gravity of the offense should act as a deterrent to would-be violators. Federal Sentencing Guidelines Manual

Tax Crimes Title 26 U.S. Code

• 7201 – Tax Evasion (liability and collectability)
• 7202 – Willful Failure to Collect or Pay Over Tax (Payroll Tax)
• 7203 – Failure to File a Tax Return, Supply Information or Pay Tax
• 7206 – Fraud & False Statements
• 7212 – Corruptly Endeavoring to Interfere with Administration of the

Internal Revenue Laws

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Other “Tax” Crimes

• Aiding & Abetting – 18 USC § 2
• Conspiracy to Defraud the Government – 18 USC § 286
• False, Fictitious or Fraudulent Claims – 18 USC § 287
• Conspiracy to Defraud the US ‐ 18 USC § 371 (also known as a Klein

conspiracy)

Related Crimes

• Identity Theft – 18 USC § 1028(a)(7)
• Wire Fraud – 18 USC § 1341
• Bank Fraud – 18 USC § 1344
• Perjury – 18 USC § 1001/1621
• False declarations before a grand jury – 18 USC § 1623
• Money Laundering ‐ 18 USC § 1956
• Structuring – 31 USC § 5324

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True or False: The IRS criminal Division has never had a less than 90% conviction rate

• n those cases taken to trial.

True!

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26 USC 7201 ‐ tax evasion

• Elements:
• Additional tax due and owing
• Affirmative act
• Willfulness
• Intentional violation of a known legal duty
• Element of every tax crime

26 USC 7201 ‐ tax evasion

2 ways to violate this statute:

• Attempt to evade assessment
• Attempt to evade payment
• Note: the statute makes criminal any attempt in any manner to evade or defeat the

assessment or payment of taxes!

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Examples of affirmative acts

• An affirmative act is “any conduct, the likely effect of which would

be to mislead or conceal.” Spies v. United States, 317 U.S. 492, 499 (1943)

• Examples:
• “Keeping a double set of books, making false entries or

alterations, or false invoices or documents, destruction of books or records, concealment of assets or covering up sources

• f income, handling of one’s affairs to avoid making the

records usual in transactions of the kind,”

Examples of affirmative acts from cases

• False statements to IRS agents – very common
• Instructing employees not to talk to IRS agents
• Filing of a false Form W‐4 or false extension request claiming no

tax is due and owing

• Use of cash, not keeping business records, paying employees in

cash and not reporting their wages

• Use of “independent contractor” status to eliminate withholding
• f taxes
• Diverting income into accounts in names of children

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Examples of affirmative acts

• f evasion of payment
• Almost always involve some form of concealment of assets or the

taxpayer’s ability to pay the tax due and owing

• Placing assets in the names of others, dealing in cash, using

nominees for businesses

• Signing and submitting false financial statements (Forms 433) to

the IRS

• Passive non‐payment of taxes is not enough
• Structuring! (like dealing in cash to avoid civil tax levies)

Elements

• Duty to collect, account for and pay over payroll taxes
• Failure to collect or truthfully account for and pay over
• Willfulness

IRC § 7202 ‐ Employment Tax Prosecutions

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IRC § 7202 – Willful failure to Collect or Pay Over Tax

• Background
• Direct—employer’s taxes
• Federal Unemployment Tax (FUTA)
• Employer’s share of the employee’s

Social Security and Medicare (FICA)

IRC § 7202 ‐ Employment Tax Prosecutions

• Fiduciary—withheld taxes
• Employee’s share of Social Security

and Medicare (FICA)

• Employee’s income tax withholding

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• Different than IRC Sections 6672 or

3505

• IRC Section 7202 makes it a felony

for the willful failure to collect, account for and pay over the employment taxes

IRC § 7202 ‐ Employment Tax Prosecutions

Primary criminal statutes

• Willful failure to collect
• r pay over tax

(26 U.S.C. Section 7202)— felony statute

• Offenses with respect to

collected taxes (26 U.S.C. Section 7215)— misdemeanor statute

IRC § 7202 ‐ Employment Tax Prosecutions

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Other charging options may include the following

• False Subscription (26 U.S.C. Section 7206(1))
• Tax Evasion (26 U.S.C. Section 7201)
• Conspiracy (18 U.S.C. Section 371)

IRC § 7202 ‐ Employment Tax Prosecutions

• The duty falls on the employer—duty is non‐delegable
• Section 7202 duties to withhold, account for and pay over are

inseparable

• The breach of any one is an offense

IRC § 7202 ‐ Employment Tax Prosecutions

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• IRC §7202 does not require proof of an affirmative/overt act—

paying

• ther creditors instead of the IRS establishes willfulness
• Applies only to fiduciary taxes
• The employer’s portion may be charged as tax evasion under IRC §7201 or

treated as relevant conduct for sentencing

IRC § 7202 ‐ Employment Tax Prosecutions

• Criminal Cases (§7202) v. Civil Trust Fund Cases (§6672)
• Recidivism
• Opening a series of companies that fail to pay
• Personal benefit reaped by the owner/operator/responsible party
• Toys
• Planes, boats, exotic autos
• Claiming benefits on personal returns

IRC § 7202 ‐ Employment Tax Prosecutions

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IRC § 7203 – Failure to File a Return, Supply Information or Pay Tax

There are four separate offenses described in I.R.C. § 7203:

• Failure to pay an estimated tax or tax;
• Failure to make (file) a return;
• Failure to keep records; and,
• Failure to supply information.

IRC § 7203 – Failure to Keep Records

Elements of the offense:

• Person required by law to maintain books and records; and,
• The willful failure to maintain books and records.

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IRC § 7203 – Failure to Supply Information

Elements of the offense:

• Person required by law to supply information;
• Failure to supply information at the time required by law; and,
• Willfulness.

IRC § 7206 – Fraud and False Statements

• False or fraudulent statements made by a taxpayer to the IRS and

those professionals who aid or assist

• Typically results from a taxpayer falsely inflating deductions or under

reporting income

• Does not require proof of a tax deficiency

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IRC § 7206(1) ‐ Declaration under the Penalties of Perjury

Elements of the Offense

• Making and subscribing a return, statement, or other document

which was false as to a material matter;

• Made under the penalties of perjury;
• Did not believe it to be true and correct; and,
• The maker did so willfully, with the specific intent to violate the law.

IRC § 7206(2) ‐ Aiding or Assisting the Preparation

• f a False or Fraudulent Document

Elements of the Offense:

• The defendant aided or assisted in, or procured, counseled, or

advised the preparation or presentation of a return, affidavit, claim,

• r other document which involved a matter arising under the Internal

Revenue laws.

• The return, affidavit, claim, or other document was fraudulent or false

as to a material matter.

• Willfulness.

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IRC § 7206(4) ‐ Removal or Concealment with Intent to Defraud

Elements of the Offense

• The defendant removes deposits, or conceals;
• Goods or commodities where a tax is or shall be imposed, or any

property upon which levy is authorized by I.R.C. § 6331; and

• Intent to evade or defeat the assessment or collection of any tax

imposed by Title 26.

I.R.C. § 7212 – Attempts to Interfere with the Administration of Internal Revenue Laws

• I.R.C. § 7212(a) contains two clauses which describe two separate
• ffenses.
• Corrupt or forcible interference. The first clause prohibits threats or

forcible endeavors to interfere with any officer or employee of the United States who is acting in an official capacity pursuant to Title 26.

• Corrupt endeavors to impede. The second clause is generally known

as the "omnibus clause" and prohibits any act which obstructs or impedes, or endeavors to obstruct or impede, the due administration

• f the tax laws.

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Corrupt or Forcible Interference ‐Offense No. 1

Elements of the Offense:

• Use of force or threats of force;
• To intimidate, impede or obstruct; and
• Officer/employee of U.S. acting in official capacity under Title 26.

Corrupt Endeavors to Impede ‐ "Omnibus Clause" ‐ Offense No. 2

Elements of the Offense:

• A corrupt effort, endeavor or attempt;
• To impede, obstruct or interfere with; and
• Due administration of Title 26.

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18 USC 286 – Conspiracy to Defraud the Government with Respect to Claims

• The entering into an agreement to defraud the government in the

manner specified

• Must prove that the defendants agreed to engage in a scheme to

defraud the government and knew that the objective of the scheme was illegal

• United States v. Okoronkwo, and United States v. Franklin, Both cases

involved conspiracies to file returns seeking refunds on behalf of large numbers of low income people.

18 U.S.C. § 287 – False, Fictitious or Fraudulent Claims

• The defendant knowingly made or presented, or caused

another to make or present, a claim for money or property to an agency or department of the United States.

• The claim was false, or fictitious, or fraudulent.
• The defendant knew the claim was false, fictitious or

fraudulent at the time it was presented.

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18 U.S.C. § 371 – Conspiracy to Commit Offense or Fraud the United States

• If two or more persons conspire either to commit any offense against

the United States, or to defraud the United States, or any agency thereof in any manner or for any purpose, and

• one or more of them does some act to effect the object of the

conspiracy, each shall be fined under this title or imprisoned not more than five years, or both.

• The essence of the crime of conspiracy is the "agreement."
• A defendant may be convicted of the crime of conspiracy even if the

underlying substantive offense was not committed.

How do criminal tax cases begin?

• Many begin as non‐tax federal grand jury or other criminal

investigations – tax fraud is the add‐on and sometimes the easiest to prove

• Examples: Department of Labor, State Revenue Cases, Mortgage

Fraud, etc

• Structuring investigations ‐ filing of CTRs and SARs triggers

investigation; IRS is charged with investigating financial crimes under titles 26 and 31

• Civil Exams
• Civil Collections

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How do criminal tax cases begin?

• Fraud referrals from
• Exams
• Collection Cases
• Whistleblowers/Ex‐Spouses
• Disgruntled ex‐employees
• Bank Secrecy Act (BSA) Exams
• IRM Section 4.26.6 – IRS is tasked with reviewing bank compliance with anti‐

money laundering laws

Exams

• Civil Exam where examiner believes they have “firm indications of

fraud”

• Examples would be significant unexplained differences in deposits vs.

reported revenue

• Significant, unexplained increases in net worth
• Taxpayer is performing actions that would lead the examiner to

believe there is criminal activity – check cashing, structuring deposits, 2nd set of book, dealing only in cash, etc.

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T‐Account Analysis by Examiners Collections

• False Collection Information Statements (433)
• False documentation (bogus paystubs)
• Dealing in cash to avoid collection activity (client structuring to avoid

levy was affirmative act)

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Hell Hath No Fury – Ex‐Spouses

• Innocent spouse claims
• Raising fraud charges in divorce court
• Whistleblowing (see next slide)

Whistleblowing for Fun, Revenge & Profit!

• File 211 with IRS and Dept. of Justice
• Awards for whistleblowers
• IRS DOES review these very carefully
• In the IRS Memorandum Of Interview will note “Confidential Source”
• r “CS”

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Let the Government Know: Form 3949‐A Whistleblowing for Fun & Profit: Form 211

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Currency Transaction Reports

Under 31 USC § 5313, “financial institutions” must file a FinCen Form 104 Currency Transaction Report (“CTR”) with the IRS reporting any deposit or withdrawal which involves a “transaction” in “currency” in excess of $10,000.

Suspicious Activity Reports – FinCen Form 111

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Criminal Investigation Process

• IRS Criminal Investigation will investigate all Title 26 crimes

a. Administrative Investigation b. Grand Jury Investigation

• IRS‐CI will review returns and other financial records
• IRS‐CI will interview potential witnesses

Administrative Summons

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Grand Jury Subpoena IRS‐CI Target Letter

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EFIN Suspension for Preparers ‐ Automatic Interviews Conducted and MOIs Completed

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Preparers Say the Damnedest Things: Actual Quotes Found in MOIs

• “Target explained he only gets paid when they receive a refund. I

pointed out that it benefits him to have his clients get refunds. He agreed.”

• “Preparer stated its his goal for next year to require documentation.”
• “Preparer stated after the return is filed he asks clients to bring

documentation back but none ever do.”

• “Preparer admitted he knew the information should not be on the

return but put it on anyway.”

Preparers Say the Damnedest Things: Actual Quotes Found in MOIs

• “I showed preparer a copy of a tax return he prepared for a client for the

2015 tax year. The client name was TAXPAYER. He did not recall her

• personally. I showed him his cover sheet and he acknowledged that the

return was prepared by him. I showed him the signature page and he identified his PTIN and EIN and name. I drew his attention to the Schedule A where there was a deduction for medical expenses in the amount of $15,332. I asked him again if he put that number on the return on his own. He reiterated that everything comes from the client.

• I advised PREPARER that TAXPAYER was actually an undercover agent for the

IRS and that her entire conversation with PREPARER was recorded and

• monitored. I further advised PREPARER that at no time during that

conversation did TAXPAYER mention medical expenses, let alone a specific

• amount. PREPARER answered that he was probably tired and put the

figures on the return accidentally.”

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Good News – Case Closed without Referral Bad News – Referral for Prosecution

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Letter to DOJ requesting conference

U.S. Sentencing Guidelines

The Tax Loss Table ‐ §2T4.1 Tax Loss (Apply the Greatest) Offense Level [1.25] (A) $2,500 or less 6 [1.25] (B) More than $2,500 8 [1.30] (C) More than $6,500 10 [1.20] (D) More than $15,000 12 [1.33] (E) More than $40,000 14 [1.25] (F) More than $100,000 16 [1.25] (G) More than $250,000 18 [1.38] (H) More than $550,000 20 [1.50] (I) More than $1,500,000 22 [1.40] (J) More than $3,500,000 24 [1.36] (K) More than $9,500,000 26 [1.25] (L) More than $25,000,000 28 [1.30] (M) More than $65,000,000 30 [1.50] (N) More than $150,000,000 32 [1.25] (O) More than $250,000,000 34 [1.38] (P) More than $550,000,000 36

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Adjustments, Departures, Variances

Specific Offense Characteristics illegal source income – USSG § 2T1.1(b)(1) - increase in 2 levels or minimum level of 12 for receipt of more than $10,000 sophisticated means – USSG §§ 2T.1.1(b)(2), 2T1.4(b)(2) – enhancement

• f 2 levels or to minimum offense level of 12

substantial portion of income from criminal activity – USSG § 2T1.4(b)(1)(A) - enhancement of 2 levels business of preparing or assisting in preparation of tax returns – USSG § 2T1.4(b)(1)(B) – enhancement of 2 levels conspiring to impede, impair, obstruct or defeat a tax – USSG § 2T1.9(b)(2) - enhancement of 2 levels

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Sentencing Table

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Sentencing Table

ELEVATE National Conference 2018 Anaheim