Unreported Income – IRS Criminal and Civil Tax Issues
1. IRC § 7201: Acts to Evade or Avoid the Collection of Taxes
“It is a crime to evade or defeat any tax” (it is a felony to intentionally attempt in any manner to evade or defeat the collection of a federal tax).
2. IRC § 7206: False Statements/Aid or Assistance
“It is a crime to make false statements to the IRS” or “assist or assist” in defeating the tax process.
3. IRC § 7212: Obstruction or impediment
“It is a felony to obstruct or prevent the proper administration of the federal Internal Revenue Code, including the collection of taxes due” (US v. Reeves 752 F.2d 995, 998, 5th Cir. Cert Denied 474 US834 (1985)).
4. “A person may be charged with conspiracy to prevent the collection of a federal tax, as well as a separate charge of impediment.” (18 USC 371)
II. ETHICAL DUTIES OF THE LAWYER (ABA)
ABA Model Rules of Professional Conduct Rules 1.2 and 1.6:
Model Rules of Professional Conduct Rule 1.2 – Scope of Representation
(d) An attorney shall not advise a client to engage in or assist a client in conduct that the attorney knows to be criminal or fraudulent.
Model Rules of Professional Conduct Rule 1.6 – Rejection or Termination of Representation
(a) Except as provided in paragraph (c) [court orders lawyer to continue representation]an attorney may not represent a client or, when representation has commenced, must withdraw from representing a client if:
(1) The representation will result in violation of the rules of professional conduct or other law. . .
third CRIMINAL TAX FRAUD
1. Sanctions
IRC §7201 imposes criminal penalties on “any person who knowingly attempts in any matter to evade or circumvent any tax…”. A violation of Section 7201 is a felony and conviction under this provision invokes a maximum fine of $100,000 for individuals and $500,000 for a corporation, or a maximum imprisonment of five years, or both, and payment of prosecution costs.
A “deliberate intent” requires more than failing to file a tax return or reporting taxable income. Such an attempt requires an affirmative and voluntary act designed to deceive the Service or hide income. [U.S. v. Meek, 998 F.2d 776 (10th Cir. 1993)] Essentially, there must be an intent to evade tax and the performance of some affirmative act to further the intent. [U.S. v. Jannuzzio, 184 F. Supp. 460 9D. Del. 1960)]
2. Burden of Proof: (Civil Fraud vs. Criminal Fraud)
Criminal fraud requires a higher standard of proof than civil fraud. The government must prove “beyond a reasonable doubt” that the defendant is guilty of criminal fraud, whereas in civil fraud, the required burden is a mere preponderance of the evidence (also called “by clear and convincing evidence”). Therefore, a criminal decision by a court or jury will bind a civil decision, but a civil decision will not bind a criminal one.
3. Statute of limitations: (civil and criminal proceedings)
The Federal Penal Code contains a general statute of limitations for prosecutions under Title 18, USCA, of five years after the commission of the crime. When the accusation is for the crime of fraudulent attempt in any way to evade or circumvent any tax, the statute of limitations is six years.
Other crimes that arise under the Internal Revenue laws generally have a three-year statute of limitations for prosecution. [IRC §6531(1)] Therefore, the government can collect civil penalties and taxes and, in addition, obtain discovery information through civil proceedings that would be illegal in a criminal proceeding (Fifth Amendment). After the three-year period, they can start criminal proceedings and use the civil file to prosecute.
IV. Attorney-client privilege
The attorney-client privilege does not protect participation in future crimes or fraud.
The Attorney-Client privilege does not include advice that assists the Client in the commission of a crime.
The object of the privilege does not include advice that helps the client in the commission of a crime. A crime/fraud exception to the attorney-client privilege is recognized. A double test is applied to decide whether this exception exists: (1) Is there prima facie evidence to show that the client engaged in criminal or fraudulent conduct when seeking the advice, was planning such conduct when seeking the advice, or that committed a crime or fraud after receiving the benefit of counsel and (2) is there evidence that the counsel’s assistance was obtained in furtherance of, or closely related to, the criminal or fraudulent conduct?
Under this exception, no privilege applies when the desired advice concerns not only a prior offense, but a future offense, that is, to further the offense charged in an indictment or future illegality.
Attorney-Client Privilege Legal Issues:
Confidential communication between a lawyer and a client for the purpose of obtaining or providing legal advice is generally protected from disclosure. Courts carefully consider whether the attorney produced the document in his legal advisory role rather than some other advisory role.
The privilege is extended to subordinates who work for the lawyer providing legal advice, such as an accountant hired by a lawyer to interpret financial data. The privilege does not extend to non-legal experts independently retained by the client, but does include in-house attorneys when providing legal advice. The privilege generally does not extend to the mere identity of legal clients and their fee arrangements.
Attorney-client privilege is recognized in tax fraud cases, but it is not absolute. Although direct attorney-client communication is protected, peripheral matters are not. The lawyer may be asked to disclose such things as his client’s name, the client’s financial status and tax payments, when and where the issues were discussed, fee arrangements, participation in litigation, and types of services, such as counseling. tax, borrowed (See In re Summons of the Grand Jury Duces Tecum [11th Cir. 1985]; Frank E. Haddad, 527 F.2d 537 [1976].)
Additionally, the attorney-client privilege applies only if the attorney is acting in an attorney capacity.
The attorney-client privilege belongs to the client and not to the attorney. This distinction is important when the taxpayer’s business is later controlled by a legal successor, such as a bankruptcy trustee.
The party claiming attorney-client privilege must specifically take advantage of the privilege at an early opportunity. Failure to assert the privilege may be considered a waiver, as may disclosure to a non-privileged third party. The resignation is interpreted in a broad sense. If a taxpayer waives the privilege on one document, he may waive all other documents related to that particular matter. Material provided to assist in the preparation of tax returns is considered intended for disclosure and, therefore, the privilege is waived. The privilege can also be waived through court filings, SEC filings, or by allowing the IRS to review the files.
Indirect testimonial use of an opinion to avoid sanctions has also been considered to waive the privilege. Courts sometimes order a closed-door review of supposedly confidential documents, but this review alone should not work to waive the privilege. However, filing documents with a state or foreign government may void the privilege.
When opposing a claim of attorney-client privilege on the basis of a tort/fraud exception, the IRS may request that the district court conduct an in-camera review of the allegedly confidential communications to determine if these communications fall within the exception of crime/fraud. However, before the request can be granted, the Supreme Court in United States v. Zolin (109 S.Ct. 2619 (1989)) stated that the party requesting the closed-door review “must present evidence sufficient to support a reasonable belief that the closed-door review may yield evidence establishing the applicability of the exception.” “.
The purpose of the privilege “is to encourage clients to make full disclosure to their attorneys.” Therefore, it protects the client’s communications to the lawyer both in oral and written form, that is, the client can make the communication orally or in writing to the lawyer. However, pre-existing records do not become confidential communications by the release of your mother to a lawyer. The status of the records in the hands of the attorney depends on their status in the hands of the taxpayer-client.
In Pescav. United States, (425 US 391 (1976)), the Supreme Court distinguished between a document that already had independent existence, information in which an attorney is communicated, and physical possession of a pre-existing document. The pre-existing document is not covered by the privilege unless it is confidential in the hands of the taxpayer-client. For this reason, a taxpayer’s attorney may be forced to produce an accountant’s work because such work would not have been privileged production in the hands of the taxpayer-client.
The IRS is requesting tax accrual and other financial audit working papers from taxpayers in certain limited circumstances. In Announcement 2002-63, 2002-2 CB 72, the IRS notified professionals that it will request and summon, if necessary, tax accrual working papers when examining tax returns claiming any of the “listed transactions” that have been identified by the IRS as tax evasion or abusive tax transactions.
These working papers are compiled by clients’ accountants to determine the extent of reserves needed to cover potential tax liability. They often reveal questionable transactions and positions taken by the client.
The announcement affects tax returns filed on or after July 1, 2002. The IRS has determined that neither the attorney-client privilege nor Section 7525 (tax professional privilege) protects these working papers. However, the IRS will exercise restraint, as has been its policy in the past, regarding requests for this information in areas other than listed transactions.
The IRS maintains agreements with most states and cities to share audit information. States also provide refund information to the IRS. When the IRS has audited a return that should require a state tax change, many states provide that their assessment statutes for such changes do not close until the taxpayer notifies the state tax authority of the change.