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The IRS reserves the threat of incarceration for taxpayers it believes are guilty of tax evasion, failure to file, or making false statements. About 3,500 cases commenced by the Criminal Investigation Division (CID) each year result in prosecution. CID generally focuses on cases having a high deterrent value.
A criminal investigation often begins with a referral from a revenue agent. All civil investigations and audits immediately cease. The revenue agent should be accorded utmost respect, but rarely should any relevant information be voluntarily disclosed. Informants and states may also provide information leading to criminal investigations. Even if a criminal investigation concludes favorably — about half the time — the civil audit which resumes could make the taxpayer’s life miserable for years.
CID possesses an array of investigative tools, including the subpoena, which commands the taxpayer to testify and produce books and records. Any “relevant” information, a term broadly defined by the Supreme Court, may be discovered. The right against self-incrimination or the attorney-client privilege might be invoked to defeat a summons.
Special agents typically request the taxpayer to submit to an interview. Showing “good faith” by consenting is inadvisable, since candor and cooperation will doubtless not lessen the chance of prosecution. False statements could result in additional criminal penalties, and telling the truth might guarantee a conviction. Rather, an interview should be refused and the taxpayer should immediately consult with counsel. Engaging an attorney is important, since the privilege possessed by a return preparer is narrow, and could later be subject to collateral attack by the IRS.
If a special agent recommends prosecution, a “conference” occurs at the district level which in theory affords the taxpayer an opportunity to present his case. In practice, it is used to obtain more damaging information.The Justice Department prosecutes most criminal tax cases; most are disposed of by plea.
CID may prove tax fraud by direct evidence of unreported income or fictitious deductions. If books and records are unavailable or inadequate, circumstantial evidence, consisting perhaps of unexplained accretions to net worth, is also permitted. However, increases in net worth alone cannot support a conviction — a likely source of income must also be established.
Indirect evidence of bank deposits exceeding reported gross income could also be presumed to establish unreported income. The burden of proof would shift to the taxpayer to disprove IRS figures.