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Understanding Parallel Civil and Criminal Investigations

Jedediah was an entrepreneurial soul.  You may remember him from the Deductibility of Criminal Restitution article, but if not, he may or may not have been pinched for embezzling money from Ned’s Tire Rack.  It turns out that he had embezzled the money from Ned, a true southern gentleman, who could sell a whitewall to a Goodyear heir, in order to finance a pyramid scheme involving ethnocentric vitamins and supplements, like his personal hero Joseph Lander, the native son of Cross City, Dixie County, Florida.

As the IRS caught wind of Lander’s shenanigans, they too discovered Jed’s poorly constructed pyramid scheme (think stucco rather than stone).  Although the scheme was initially discovered through a relatively routine audit of a not-so-routine tax return (Jed was a bit of a tax protester, as well), the IRS’s Criminal Investigation (CI) Division soon became involved.

Side note:  If you are going to engage in fraud, it is not in your best interest to file a return in protest of the United States’ ability to impose a federal tax on you as a sovereign citizen of your chosen state.  Not only will the IRS pick up your return for audit (the “Don’t Tread on Me” sticker over Schedule A was a nice, if not slightly showy touch), they will look at it with some scrutiny. 

Don’t engage in fraud. 

But if you do, at least make the filing look correct. 

But, really, don’t engage in fraud.

General Purpose of Investigations

The purpose of criminal and civil tax investigations is to enforce the tax laws and to encourage voluntary compliance. The IRS has observed that attempts to pursue both the criminal and the civil aspects of a case concurrently often jeopardize the successful completion of the criminal case. It is, therefore, necessary in the interests of criminal enforcement of the law, to identify those instances when criminal actions generally will take precedence over the civil aspects.

Nonetheless, it is also necessary to identify those instances where civil and criminal actions should be coordinated to stop abusive promoters and return preparers. The Code contains both civil and criminal provisions to address fraud. Revenue officers may conduct civil investigations before, during or after criminal investigations of the same taxpayer. If the investigation is conducted simultaneously with the criminal investigation, the process is referred to as a “parallel investigation.”

Parallel Investigations

Parallel proceedings involve simultaneous investigations or litigations of separate civil and criminal aspects of a case involving a common individual or entity. Some potential civil remedies that could occur in a parallel proceeding are Trust Fund Recovery Penalty investigations under IRC § 6672, injunctions for pyramiding taxpayers, Notice of Federal Tax Lien filings, issuance of levies, jeopardy levies, service of summons, and pursuit of erroneous refunds.

Taxes Not Included in Criminal Investigation

Civil enforcement actions, including enforced collection activity, with respect to taxable periods of the same and other types of tax not included in the criminal investigation generally do not imperil successful criminal investigation or subsequent prosecution. Therefore, civil enforcement actions for tax liabilities for such other taxable periods or different types of tax for the same periods will proceed concurrently unless there is agreement between the responsible functions to withhold civil action in whole or part during the pendency of the criminal investigation.

Taxes Included in Criminal Investigation

Civil enforcement actions with respect to the same taxable periods and same types of taxes for those periods included in the criminal investigation may imperil subsequent prosecution. Therefore, the consequences of civil enforcement actions on the criminal investigation and prosecution case should be carefully weighed. However, there generally should be no suspension of collection action on assessed amounts of tax liabilities reported on filed returns.

Suspension of Civil Action

A decision will be made as to whether to conduct parallel investigations, to proceed solely criminally, or to proceed solely civilly. In many instances, civil action may be suspended temporarily (generally for no more than 90 calendar days), for example, to permit Criminal Investigation (CI) to complete an undercover investigation or execute a search warrant.

Interviews

If a taxpayer under investigation inquires about criminal implications or whether the taxpayer is the subject of a criminal investigation before CI has contacted the taxpayer, the revenue officer must be careful to provide accurate information and not mislead the taxpayer. The revenue officer should inform the taxpayer that they are conducting a civil investigation, and that the information obtained can be shared with CI. The revenue officer is prohibited from informing the taxpayer that the case has been referred to CI, as this is the province of the IRS agents with badges and guns.

If the special agent has informed the taxpayer under investigation of his or her Fifth Amendment rights, the revenue officer must explain to the taxpayer or his or her representative at each meeting that the revenue officer is conducting a civil investigation and the information provided will be shared with CI.

Information Sharing

Unless prohibited under grand jury secrecy[1] and the Code’s disclosure provisions,[2] information sharing between civil and criminal functions is appropriate. Judicial districts and appellate courts have diverse rulings on what constitutes grand jury information; therefore, a determination about what information can be shared will be made on a case-by-case basis.

Revenue officers must inform CI that civil files are available, and access to all available information in the civil file must be provided to CI. On the flip side, Special agents can develop evidence administratively through summonses, search warrants, witness interviews, and undercover operations. Evidence developed administratively before using the grand jury process may be shared by CI with Collection.

No Direction of Civil Exam from CI

It should be remembered that civil and criminal parallel investigations are conducted as separate investigations, and although regularly scheduled coordination meetings are required, CI must not direct the Exam’s actions in the civil investigation.


Footnotes:

[1] Rule 6(e) of the Federal Rules of Criminal Procedure.

[2] IRC § 6103 (Confidentiality and Disclosure of Returns and Return Information).

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