Navigating the Criminal Tax Fraud Investigation Meagan F. Temple Johnson, Bruzzese & Temple

How Do Investigations Start? Audit Audit “Cooperating witness” (i.e. a snitch) “Cooperating witness” (i.e. a snitch) Divorced spouse Divorced spouse Disillusioned business partner Disillusioned business partner Illegal immigrant worker Illegal immigrant worker

What Types of Investigation? Failure to file Failure to file Failure to report Failure to report Includes international/offshore “investments” Includes international/offshore “investments” Failure to withhold Failure to withhold Fraudulent deductions Fraudulent deductions

Who’s Being Investigated? Subject – has information that suggests his/her involvement Subject – has information that suggests his/her involvement Witness – has information that does not suggest his/her involvement Witness – has information that does not suggest his/her involvement Target – the person being investigated Target – the person being investigated *status can change without notice!

Federal Investigations When you first learn the IRS is conducting a criminal investigation, make sure you secure all records relevant to the client being investigated. When you first learn the IRS is conducting a criminal investigation, make sure you secure all records relevant to the client being investigated. Watch out for obstruction of justice Watch out for obstruction of justice

Federal Investigations Summons Summons Grand jury subpoena Grand jury subpoena Visit from investigating agent Visit from investigating agent

Summons Issued to taxpayer Issued to taxpayer “Administrative” “Administrative” Was it given by CID agent? Was it given by CID agent? If yes, client should contact an attorney immediately. If yes, client should contact an attorney immediately.

Grand Jury Subpoena Not usually given to client first Not usually given to client first Likely given to accountant for records Likely given to accountant for records What should you do? What should you do?

Grand Jury Subpoena Contact an attorney Contact an attorney Need to talk to an attorney who handles *criminal* tax investigations Need to talk to an attorney who handles *criminal* tax investigations Ok to ask attorney friends/colleagues for referral, but use caution before retaining attorney who does not practice in this area Ok to ask attorney friends/colleagues for referral, but use caution before retaining attorney who does not practice in this area Don’t want to incriminate yourself Don’t want to incriminate yourself Don’t want to incriminate client Don’t want to incriminate client

Grand Jury Subpoena (Why do I need a lawyer?) Protection against self-incrimination Protection against self-incrimination You don’t know what you don’t know You don’t know what you don’t know Does CID agent think you were complicit? Does CID agent think you were complicit? Attorney can contact investigating agent Attorney can contact investigating agent Find out if they consider you a target/subject Find out if they consider you a target/subject Help to narrowly tailor response to subpoena Help to narrowly tailor response to subpoena May avoid having to appear May avoid having to appear At some point, CID will want your cooperation – you will need representation At some point, CID will want your cooperation – you will need representation

Why Can’t I Just Call My Client’s Lawyer? Because… Because… Your client might be claiming you are at fault Your client might be claiming you are at fault Your client’s lawyer is not your advocate Your client’s lawyer is not your advocate You have no way of knowing if your client’s lawyer has experience in this area You have no way of knowing if your client’s lawyer has experience in this area Your client’s lawyer may advise you to do something the IRS would consider obstruction Your client’s lawyer may advise you to do something the IRS would consider obstruction

Visit from a CID Agent You are entitled to speak with a lawyer You are entitled to speak with a lawyer They won’t tell you that They won’t tell you that Even if you did everything right, you are too close to a very serious situation Even if you did everything right, you are too close to a very serious situation They love to visit people at their place of business or homes because it’s comfortable They love to visit people at their place of business or homes because it’s comfortable “We’re not sure he did anything wrong.” “We’re not sure he did anything wrong.”

Visit from a CID Agent, cont’d. CID agents ARE NOT ACCOUNTANTS CID agents ARE NOT ACCOUNTANTS They’re cops They’re cops They probably won’t know the accounting nuances even if you explain it to them They probably won’t know the accounting nuances even if you explain it to them So what benefit is it to you or your client to speak to them? So what benefit is it to you or your client to speak to them? All you have to say is, “I wish I could help you today, but I need to speak with an attorney. Can I have your card? I’ll have my lawyer contact you.” All you have to say is, “I wish I could help you today, but I need to speak with an attorney. Can I have your card? I’ll have my lawyer contact you.”

Visit from a CID Agent, cont’d. Won’t I “look guilty” if I don’t talk to the agent? Won’t I “look guilty” if I don’t talk to the agent? You’ll look a lot more guilty if you admit to conduct that was criminal You’ll look a lot more guilty if you admit to conduct that was criminal Remember – you don’t know, what you don’t know Remember – you don’t know, what you don’t know Right against self-incrimination means you don’t have to say anything that tends to incriminate you Right against self-incrimination means you don’t have to say anything that tends to incriminate you

Client’s Investigators Your client may hire a special investigator to interview witnesses Your client may hire a special investigator to interview witnesses Former law enforcement personnel Former law enforcement personnel Direct them to your lawyer, if you are represented Direct them to your lawyer, if you are represented

Forensic Accounting in Criminal Cases Consultants at investigative stage Consultants at investigative stage Work covered by attorney-client privilege Work covered by attorney-client privilege Caution – conversations with taxpayer- defendant Caution – conversations with taxpayer- defendant Role Role Help lawyers understand accounting problems Help lawyers understand accounting problems Determine tax deficiency Determine tax deficiency

Forensic Accounting in Criminal Cases Federal prosecutions driven by the sentencing guidelines Federal prosecutions driven by the sentencing guidelines Sentence will largely be a function of tax deficiency Sentence will largely be a function of tax deficiency U.S.S.G. 2T4.1 U.S.S.G. 2T4.1 28% default tax rate on unreported income 28% default tax rate on unreported income

Forensic Accounting in Criminal Cases Purpose Purpose To cooperate To cooperate To challenge To challenge Don’t assume IRS has fully investigated Don’t assume IRS has fully investigated They’re overworked & underpaid They’re overworked & underpaid Klein conspiracy Klein conspiracy

Privilege Forensic accountants as consultants to lawyers covered under attorney-client privilege Forensic accountants as consultants to lawyers covered under attorney-client privilege But not as witnesses But not as witnesses No accountant-client privilege under Federal law No accountant-client privilege under Federal law Pennsylvania does recognize accountant- client privilege Pennsylvania does recognize accountant- client privilege

Reliance on Counsel Defense Applies to advice from lawyers and accountants Applies to advice from lawyers and accountants Negates element of willfulness and knowledge Negates element of willfulness and knowledge Client must have acted honestly and in good faith Client must have acted honestly and in good faith Client must have fully and honestly laid all the facts before the accountant Client must have fully and honestly laid all the facts before the accountant

Reliance on Counsel Defense, cont’d Client must have honestly and in good faith followed the advice of the accountant Client must have honestly and in good faith followed the advice of the accountant Client must have actually believed the advice to be correct Client must have actually believed the advice to be correct Client intended acts to be lawful when he/she went to account for advice Client intended acts to be lawful when he/she went to account for advice

QUESTIONS?

Meagan F. Temple Johnson, Bruzzese & Temple 707 Grant Street, Suite 1720 Pittsburgh, PA (412)