The criminal investigation is the heavy artillery of the IRS arsenal. It is used in only a tiny percentage of cases, but its impact is devastating. It can bring personal, social and financial ruin, loss of professional licenses, huge monetary fines, and incarceration. And despite the jokes about "Club Fed," spending a couple of years in federal prison is no laughing matter.

Often you won't know that an IRS criminal investigation has started until it is too late. But sometimes there are "warning signs:"

A Revenue Officer who has been pressing you for payment suddenly disappears and won't return your phone calls.

This is not necessarily a stroke of good luck. Instead, he may be back at the office writing up a referral to his friends in the Criminal Investigation Division.

A Revenue Agent who has been auditing your tax returns disappears for days or weeks.

Again, this isn't cause for celebration. The case may have been referred. When the Criminal Investigation Division is in a case, or even considering whether to accept a referral from another division, no action is taken for fear that something done by the Examination Division or the Collection Division will harm the chances of a successful prosecution down the road.

Your bank notifies you that the Criminal Investigation Division of the IRS (using a summons), or the local U.S Attorney's Office (using a grand jury subpoena), has requested copies of your bank records.

You need representation to track the IRS investigation and secure the same records the IRS gets in these cases. Knowledge is power.

Your accountant is contacted by Special Agents or is subpoenaed to appear before a grand jury and bring your tax records.

Since conversations with your accountant are not protected in a criminal investigation or prosecution, discussions you may have had in the past are fair game for questions by the IRS or the grand jury. Obviously, this means that once you know you are under investigation you should say nothing at all to your accountant, or you may someday watch him being forced to repeat the conversation from the witness stand. Accountants are an integral part of the defense team in any criminal tax matter, but only when they have been retained by counsel and thus are brought within the attorney-client privilege under U.S. v. Koval , 296 F.2d 918 (2d Cir. 1961) and other cases which have followed it. The so-called accountant-client privilege provided under state law, and even under the Internal Revenue Code itself, does not apply in a criminal case.

You are notified by the IRS that one of your previous tax returns has been "selected" for audit, and you know that in the tax year in question there was an understatement of income or an overstatement of deductions.

If the returns you filed contain either understatements of income or overstatements of deductions, you should not have any further discussions with your accountant or anyone else until you have retained legal counsel. This is often referred to as the "egg shell audit" situation. While it may at present be only a civil examination, Revenue Agents are trained to watch for "badges of fraud," and to refer potential fraud to the Criminal Investigation Division. The "accountant-client privilege" does not extend to criminal investigations, so your accountant may be forced to tell the IRS and the grand jury everything you have told him.

A Special Agent contacts you.

This is not a warning sign; it is a giant roadside billboard with flashing lights. You will be told that you are not required to speak with the Agent, and that you may have a lawyer present, but the Agent will then try to get you to talk -- for hours. Special Agents love these ambush interviews. They know only too well that once you hire an attorney they will probably not again have the chance to talk with you, so their best and perhaps only chance of getting statements useful to them in prosecuting you is to get you to talk before you are represented by counsel. DON'T DO IT!! Do not talk to the Agentor give him any information or documents. Instead, respectfully tell him that you would like to consult with counsel, and nothing more. If you are already under investigation by CID and you have been talking and "cooperating" with any Special Agent, STOP IMMEDIATELY and retain competent counsel. If you try to handle this on your own, you will have plenty of time in prison to contemplate the old adage "a man who represents himself has a fool for a client."

If any of these things happen to you, drop whatever you are doing and find competent representation immediately -- you're going to need it. Please understand that there are relatively few criminal tax investigations each year, so not many attorneys are experienced in handling them. In fact, it is almost impossible to handle these cases correctly unless you have been an Assistant U.S. Attorney, a Department of Justice trial attorney, or an IRS Special Agent. You owe it to yourself to find someone with these qualifications. Call us -- we can help!

WANT MORE INFORMATION?

Tax Fraud Investigations -- A Procedural Roadmap, by Burton J. Haynes with Joseph M. Jones. published in the "Corporate Criminal Liability Reporter."

Dealing With The IRS Collection Division: Healing Self-Inflicted Wounds - Representing Nonfilers©, published in "The Freestate Accountant" as a part of Mr. Haynes' series "Dealing with the IRS Collection Division."

Manual for Criminal Tax Trials , U.S. Department of Justice, Tax Division.

Internal Revenue Manual -- Part 9 (Criminal Investigations)