IRS criminal investigations

What Not to Do in an IRS Criminal Investigation

Mar 25th 2019
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Usually, the IRS assigns special agents from the Criminal Investigation Division to investigate suspected violations of the tax laws. What should your clients do if they become aware that they’ve been singled out for a criminal investigation?

The answer? Not much. In fact, the options immediately dwindle to one: Get the advice of an attorney knowledgeable about criminal investigations before you hand over any records or make any statements to special agents. Such disclosures can come back to haunt you when government sleuths piece them together and repeat them on the witness stand.

Here’s what happened when special agents delved into the returns of Alex, an Illinois dentist who mistakenly thought he could pull one over on the investigators.

Alex arrived at his office one morning. As the dentist made his way through the parking lot, he encountered two agents who hadn’t called for an appointment. Not a good time to talk, said Alex. He was scheduled to play golf.

But because Alex had read a dental magazine article on how to handle IRS agents without a lawyer present, he saw no harm in agreeing to meet with them for an hour after treating several patients.

The hiatus didn’t help, and things soon went badly. The agents’ unrelenting questioning stretched the conversation well beyond one hour, and he had to cancel his golf game.

What doomed Alex was that the two sleuths spotted more than $40,000 in payments from patients that somehow never found their way into the records for receipts that were used to prepare his 1040 forms, and the inquisitors were unyielding in their unwillingness to accept his explanations for why those payments went unreported.

Something worth mentioning is that the IRS tells special agents to prepare contemporaneous memos detailing how taxpayers react when questioned and what they say.

In accordance, the two agents noted Alex’s reactions and disclosures. Among other things, they mentioned that he became extremely nervous and started to sweat profusely. At one point, the dentist even sought their permission to lie down, saying, “I can’t take it at this time.” 

He occasionally sought to break the tension by, among other things, discussing his academic achievements and advising one of the agents how to alleviate emphysema. They twice asked Alex if he wanted to end the conversation and leave for his golf outing. He stayed.

After several hours, Alex realized that the agents had him dead to rights, and he confessed to not reporting the payments in issue. He wound up receiving a three-year sentence and a nondeductible fine of $5,000 for tax fraud. The criminal sanctions were on top of similarly nondeductible civil liabilities for back taxes, interest and penalties.

Here’s the takeaway: If one of your clients is under investigation by the IRS, advise them not to speak to the agents without an attorney present.

Additional articles. A reminder for accountants who would welcome advice on how to alert clients to tactics that trim taxes for this year and even give a head start for next year: Delve into the archive of my articles (more than 275 and counting). 

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