It is a fact that in your lifetime you likely will be audited by the IRS examination division as long as you are legally required to file tax returns each year. However, there is a remote possibility that an IRS agent during a routine examination of your tax return might refer your case or at least consider referring your case to the IRS Criminal Investigation Division. (CID). This may happen because of something you innocently said to the IRS agent. Or perhaps a disgruntled ex-employee or not so happy ex-wife communicated with the agent? Perhaps you talked too much to the agent and innocently said something misleading that was not quite true? Moreover, for whatever reason, if CID is called in to investigate you and finds insufficient evidence to continue their investigation, CID will refer the case back to IRS agent to conclude the examination. However, as I see it, any IRS audit of your tax return throws your constitutional 5th amendment rights to remain silent in a boxing ring with a powerful legitimate government interest to enforce tax collection for the US Treasury. These clashing interests emerge at the precise moment that the IRS examining agent begins the audit of your income tax return, up to the point that the agent refers your audit to CID. If this referral to CID should happen to you how would you protect yourself and your family from the adverse consequences and publicity that would soon come crashing through your door?
Before we can answer this question we need to review a few interesting facts about the CID. According to the IRS website: “IRS Criminal Investigation Division (CID) is comprised of approximately 3,700 employees worldwide, approximately 2,600 of whom are special agents whose investigative jurisdiction includes tax, money laundering and Bank Secrecy Act laws” The site goes on to say: IRS special agents must follow strict procedures to initiate an investigation and recommend prosecution to the Department of Justice. These procedures include approval by several IRS officials to ensure investigations are based on factual evidence that tax fraud or another financial crime has occurred. While no doubt there are only about a thousand or so taxpayers that actually are indicted and convicted of tax evasion each year, just the threat of a criminal investigation may be enough to turn your life inside out.
In order to better understand the significance of the words we say to the IRS we turn as we often do to case law. The Greve case decided in 2007, US v Greve US Court of Appeals for the 7th Circuit. involved James Greve who was head of Greve Construction his family business. Greve’s 1997 tax return was audited by IRS examination division agent Luke. As the audit progressed Greve seemed disorganized and overwhelmed and in my view should have brought in an attorney sooner than he did. By 2001 examination agent Luke and other revenue agents were considering a referral to CID. As a result, Greve was indicted by a Grand Jury in 2005. Greve was subsequently convicted and found guilty of criminal tax evasion. Greve appealed to Federal District Court and lost. Greve then appealed to the 7th Circuit and filed a motion to suppress and dismiss his statements to the IRS agents based on 5th Amendment violations of his right to remain silent. Greve contends in his motion that Luke affirmatively mislead him by continuing to conduct a civil audit after she had firm indications of fraud. Specifically, Greve maintains that Luke made false promises to him by repeatedly advising him that his cooperation would result solely in a civil tax assessment. This allegedly caused Greve to talk too much in violation of his 5th amendment right to remain silent in a possible criminal proceedings. The Court did not agree. Although the IRS regulations require a civil investigator to cease her investigation when she has developed firm indications of fraud, see Internal Revenue Manual §§ 4565.21(1), 9311.83(1), we have held that “[a] failure to terminate a civil investigation when the revenue agent has obtained firm indications of fraud does not, without more, establish the inadmissibility of evidence obtained by [the agent] in continuing to pursue the investigation.” United States v. Kontny, 238 F.3d 815, 820 (7th Cir.2001). Based on this interpretation of Kontny, the Court found for the US Government.
Let’s take a look at Kontny. The facts in Kontny are simple: The Kontnys owned an equipment supply business. For over 10 years they defrauded the government of payroll and income taxes by not reporting overtime of their employees to the IRS. The employees knew about this scheme and benefited as well. However, as a result of a labor dispute, one of the disgruntled employees informed CID of the IRS about the scheme. CID assigned civil agent Furnas, who know all about the CID involvement, to investigate Kontny’s tax return. Kontny talked with Furnas before hiring legal counsel. Partly due to his excessive chatter with Furnas, Kontny was convicted of tax fraud and sentenced to jail. Kontnys motion to suppress his statements to Furnas based on the 5th amendment right to remain silent was denied by the District Court and Kontny appealed to the 7th Circuit where his motion was denied.
Judge Posner’s Opinion was that Kontnys talking to Furnas was voluntary and therefore not protected by his 5th amendment right to remain silent. The Court notes that virtually all cases involving coerced confessions involve the questioning of a suspect who is in police custody, an inherently intimidating situation in which people find it difficult to stand up for their rights or even to think straight. The situation is different when a person who does not even know that he is a criminal suspect (that is a premise of the Kontnys’ appeal) is being interviewed in his home, and by a civil rather than a criminal investigator to boot. Furnas was unarmed, un-uniformed, unaccompanied. The Kontnys were at no disadvantage in dealing with him. They were under no pressure to answer his questions. Any answers they gave were voluntary. Trickery, deceit, even impersonation do not render a confession inadmissible, certainly in noncustodial situations and usually in custodial ones as well, unless government agents make threats or promises. Frazier v. Cupp, 394 U.S. 731.
Frazier was convicted in an Oregon state court of second-degree murder in connection with the September 22, 1964, slaying of one Russell Anton Marleau. After the Supreme Court of Oregon had affirmed his conviction, 245 Or. 4, 418 P.2d 841 (1966), Frazier filed a petition for a writ of habeas corpus in the United States District Court for the District of Oregon. The District Court granted the writ, but the Court of Appeals for the Ninth Circuit reversed, 388 F.2d 777 (1968). The US Supreme Court granted certiorari to consider three contentions of error raised by Frazier. Justice Thurgood Marshall’s Opinion finds none of these allegations sufficient to warrant reversal. Here are the facts: When Frazier was brought in by police for questioning he was still was reluctant to talk, but after the officer sympathetically suggested that the victim had started a fight by making homosexual advances, petitioner began to spill out his story. Shortly after he began he again showed signs of reluctance and said, “I think I had better get a lawyer before I talk any more. I am going to get into trouble more than I am in now.” The officer replied, “You can’t be in any more trouble than you are in now,” and the questioning session proceeded. A full confession was obtained and, after further warnings, a written version was signed. Since Frazier was tried after this Court’s decision in Escobedo v. Illinois, 378 U.S. 478 (1964), but before the decision in Miranda v. Arizona, 384 U.S. 436 (1966), only the rule of the former case is directly applicable. Johnson v. New Jersey, 384 U.S. 719 (1966). Petitioner argues that his statement about getting a lawyer was sufficient to bring Escobedo into play and that the police should immediately have stopped the questioning and obtained counsel for him. The Court concludes it was not. The Confession was valid because Frazier predated Miranda.
Miranda notwithstanding, as far as I can tell, if you say something in your polite conversation to an IRS agent during a routine audit that possible incriminates you later during a criminal investigation, you cannot then suppress what you said even if the government knew that a criminal investigation was underway, and sadly even if the IRS questioning of you violates its own internal rules during the civil examination. What does this mean for all of you who file tax returns each year? As Frazier makes clear, if you get audited by the IRS, and if you voluntarily talk to the IRS agent during your audit, you have no constitutional 5th amendment rights to suppress those statements in later criminal proceedings. In conclusion, it appears to me that If you get audited best practice would be to have your tax attorney do the talking. We should never forget that Americans have a 5th amendment right to remain silent and to have an attorney represent us to keep us safe and protected.
Thank you for joining Chris Moss CPA on TaxView
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Chris Moss CPA