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Stephen J. Dunn a contributor for Forbes magazine offers some key tips for taxpayers who are accused of filing fraudulent tax returns. Interestingly, according to Dunn, the best evidence the IRS obtains in support of a fraud case comes from the taxpayer themselves, disgruntled employees and even family members.
In the case of the taxpayer implicating him/herself, the IRS usually sends field agents to visit the taxpayer. It is at that meeting the IRS will ask pressing and pointed questions concerning the alleged fraud. The taxpayer is NOT required to answer any of their questions at this initial meeting, nor should they unless in the presence of appropriate counsel. Furthermore, many former employees who perceive they were slighted are all too happy to provide the IRS with evidence of their employer’s fraud. Estranged spouses going through a divorce may also use the threat of reporting their counterpart to the IRS in the hopes of extracting a more favorable settlement.
When one considers legal fees, repayment of back taxes, penalties, the prospect of jail time–and not to mention the copious amount of personal time expended–the risk simply is not worth the reward as the capital expended defending oneself will almost always exceed the capital that was not reported. The following is a list of Dunn’s tips:
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.
To read Dunn’s complete article, click here.